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 a mutual fund
currently consisting of four separate Series - the Florida Series, the Georgia
Series, the Michigan Series and the Pennsylvania Series. The Florida Series
offers two classes of shares: Class A shares and Class C shares. All other
Series of the Fund offer a single class of shares: Class A shares. The existence
of a two-class structure in the Florida Series provides investors with different
purchasing options. See "Investment in the Florida Series" under "Purchases" for
a description of these choices. Each Series seeks as high a level of interest
income exempt from federal income tax and its respective state's personal income
tax, if any, as is consistent with reasonable risk. At present, Florida imposes
no income tax on individuals. Each Series invests in intermediate- and long-term
municipal bonds which can fluctuate in value as interest rates change. 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. This 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 and asking 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, 1998.
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 each 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 each 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 5
5 Purchases 9
6 Shareholder Services 15
7 Our Management 16
8 Dividends, Capital Gains
Distributions and Taxes 16
9 Redemptions 18
10 Performance 19
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 also may be sold in Michigan and Ohio.
<PAGE>
INVESTMENT OBJECTIVE
Our investment objective for each Series is to seek as high a level of interest
income exempt from federal income tax and its state's personal income tax, if
any, as is consistent with reasonable risk. For this purpose, "reasonable risk"
means that each Series over time will have a volatility approximating the Lehman
Brothers Current Coupon Long Index. Each Series invests in intermediate- and
long-term municipal bonds (initially investment-grade or equivalent) and,
therefore, each Series' shares can fluctuate in value more than shares of a
short-term municipal bond fund, as interest rates change, but such fluctuation
ought to be 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.
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 more
or less than those shown.
Florida Georgia Michigan Pennsylvania
Shareholder
Transaction
Expenses(1) Class A Class C Class A Class A Class A
(as a percentage
of offering price)
Maximum Sales Load(2)
on Purchases (See 4.75% 4.75% 4.75% 4.75%
"Purchases")
Deferred Sales Load(2) None 1% if shares None None None
(See Purchases) are redeemed
before 1st
anniversary of
purchase
Annual Fund
Operating Expenses(3)
(after management
fee waivers)
Management Fee .50% .50% .00% .50% .50%
(After Waiver)
(See "Our Management")
(4)
12b-1 Fees .25% 1.00% .00% .00% .25%
(See "Purchases")(1)(2)
Other Expenses .11% .11% .38% .18% .15%
(After Subsidy)
(See "Our Management")
Total Operating
Expenses(4) .86% 1.61% .38% .68% .90%
Example: Assume each Series' annual return is 5% and there is no change in the
level of expenses described above. For a $1,000 investment with reinvestment of
all dividends and distributions, you would pay the following total expenses,
assuming redemption on the last day of each period indicated:
1 year 3 years 5years 10 years
Florida Series
Class A $56 $74 $93 $149
Class C $27 $51 $88 $191
Georgia Series
Class A $51 $59 $68 $93
Michigan Series
Class A $54 $68 $84 $128
Pennsylvania Series
Class A $56 $75 $95 $153
Example: You would pay the
following expenses on the same investment, assuming no redemption:
1 year 3 years 5years 10 years
Florida Series
Class A $56 $74 $93 $149
Class C $16 $51 $88 $191
Georgia Series
Class A $51 $59 $68 $93
Michigan Series
Class A $54 $68 $84 $128
Pennsylvania Series
Class A $56 $75 $95 $153
(1)Although the Florida Series does not charge a front-end sales charge with
respect to its Class C shares, investors should be aware that long-term Class C
shareholders may pay, under the Rule 12b-1 plan applicable to the Class C
shares, more than the economic equivalent of the maximum front-end sales charge
as permitted by certain rules of the National Association of Securities Dealers,
Inc. Similarly, with respect to Class A shares of all Series, investors should
be aware that, over the long term, such maximum may be exceeded due to the Rule
12b-1 plan applicable to the Class A shares. The Rule 12b-1 fees for the Georgia
and Michigan Series have been omitted because the Fund cannot predict when the
net assets of these Series will reach the required level for effectiveness of
each Series' Class A 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. (2)Sales "load" is referred to as sales "charge" and "deferred sales
load" is referred to as "contingent deferred sales charge" (or "CDSC") and
"12b-1 fees," which consist of a "service fee" and a "distribution fee," are
referred to by either or both of these terms where appropriate throughout this
Prospectus. (3The annual operating expenses shown in the summary have been
restated from October 31, 1997 fiscal year amounts to reflect current fees.
(4)Although not obligated to, Lord, Abbett & Co. ("Lord Abbett") may waive a
portion of its management fee and assume other expenses with respect to each
Series. Subsequently, Lord Abbett may charge management fees and not subsidize
expenses on a partial or complete basis. The management fee would have been .50%
and total operating expenses would have been .88% for the Georgia Series, absent
such waiver and subsidy. The foregoing is provided to give investors a better
understanding of the expenses that are incurred by an investment in each Series.
FINANCIAL HIGHLIGHTS
The following tables have been audited by Deloitte & Touche llp, independent
auditors, in connection with their annual audits of the Fund's financial
statements, whose report thereon is incorporated by reference into the Statement
of Additional Information and may be obtained on request.
CLASS A SHARES
For the Period
Florida Series September 25, 1991
(Commencement of Operations)
to October 31, 1991
Per Share+ Operating Year Ended October 31,
Performance 1997 1996 1995 1994 1993 1992
Net asset $4.79 $4.85 $4.49 $5.28 $4.75 $4.76 $4.76
value,
beginning of
period
Income (loss) from investment
operations
Net investment
income .240 .248 .271 .291 .297 .308 .027
Net realized
and unrealized
gain (loss)
on securities .092 (.056) .352 (.695) .549 .002 .000
Total from
investment
operations .332 .192 .623 (.404) .846 .310 .027
Distributions
Dividends from
net investment
income (.252 ) (.252) (.263) (.2835) (.301) (.320) (.027)
Distributions
from netrealized
gain -- -- -- (.1025) (.015) -- --
Net asset value,
end of period $4.87 $4.79 $4.85 $4.49 $5.28 $4.75 $4.76
Total Return*7.12% 4.09% 14.22% (8.03%) 18.24% 6.65% .57++
Ratios/Supplemental Data:
Ratios to Average Net Assets:
Expenses, including
waiver .86% .80% .74% .32% .38% .29% .00%++
Expenses
excluding waiver .86% .82% .88% .82% .88% .78% 5.10%++
Net investment
income 5.03% 5.19% 5.81% 5.98% 5.71% 5.84% .55%++
Florida Series CLASS C SHARES
For the Period
July 15, 1996** to
October 31, 1996
Per Share Operating Year Ended
to Performance: October 31, 1997
October 31, 1996
Net asset value, beginning $4.79 $4.70
of period
Income from
investment operations
Net investment income .202 .064
Net realized and
unrealized gain on securities .093 .093
Total from investment operations .295 .157
Distributions
Dividends from net investment
income (.215) (. 067 )
Net
asset value, end of period $4.87 $4.79
Total Return* 6.33% 3.35%++
Ratios/Supplemental Data:
Ratios to Average Net Assets:
Expenses, including
waiver 1.57% .44%++
Expenses, excluding waiver 1.57% .44%++
Net investment
income 4.29% 1.37%++
Florida Series For the Period
September 25, 1991
(Commencement
of Operations) to
October 31, 1991
Supplemental Data Year Ended October 31,
For All Classes: 1997 1996 1995 1994 1993 1992
end of period (000) $144,748 $162,070 $173,242 $174,844 $191,463 $121,408
(Commencement
of Operations) to
October 31, 1991
$108,550
Portfolio turnover
rate 106.32% 167.95% $142.04% 122.36% 89.32% 94.60%
September 25, 1991
(Commencement
of Operations) to
October 31, 1991
100.00%
*Total return does not consider the effects of sales loads. **Commencement of
offering Class shares. +The Series had only one class of shares prior to July
12, 1996, which is now designated as Class A shares. ++Not annualized. See Notes
to Financial Statements.
CLASS A SHARES
For the Period
Pennsylvania Series February 3, 1992
(Commencement
Per Share Operating Year Ended October 31, of Operations)to
Operating October 31, 1992
Performance 1997 1996 1995 1994 1993
Income from
investment operations
Net investment
income .276 .2772 .282 .300 .299 .228
Net realized
and unrealized
gain (loss) on
securities .131 (.0011) .395 (.6975) .582 (.006)
Total from
investment
operations .407 .2761 .677 (.3975) .881 .222
Distributions
Dividends from
net
investment
income (.277) (.2761) (.2870) (.2925) (.301) (.232)
Distributions
from net
realized gain -- -- -- (.02) -- --
Net asset value,
end of period $5.14 $5.01 $5.01 $4.62 $5.33 $4.75
Total Return* 8.37% 5.68% 15.02% (7.73)% 18.95% 4.68%+
Ratios/Supplemental
Data: Net assets,
end of period
(000) $94,237 $92,605 $93,494 $81,258 $82,113 $41,207
Ratios to Average Net Assets:
Expenses,
including waiver .61% .62% .50% .33% .31% .00%+
Expenses,
excluding waiver .65% .69% .65% .68% .81% .61%+
Net investment
income 5.47% 5.55% 5.83% 5.98% 5.70% 4.42%+
Portfolio
turnover rate 70.99% 78.30% 126.11% 137.22% 7.71% 32.66%
Georgia Series - Class A Shares Michigan Series - Class A Shares
Georgia Series
Michigan Series
For the Period For the Period
December 27, 1994 December 1, 1992
Year Ended (Commencement of Year Ended (Commencement
Per Share October 31, Operations) to October 31, of Operations) to
Operating October 31, 1995 '97 '96 '95 '94 October 31, 1993
Performance 1997 1996
Net
asset value,
beginning of
period $5.14 $5.12 $4.76 $4.93 $4.93 $4.53 $5.23 $4.76
Income from
investment operations
Net
investment
income .275 .290 .245 .267 .274 .284 .286 .266
Net realized and unrealized
gain (loss)
on
securities .187 .0397 .370 .128 (.010) .395 (.651) .480
Total from
investment
operations .462 .3297 .615 .395 .264 .679 (.365) .746
Distributions
Dividends from net investment
income (.282) (.2872) (.255) (.265) (.264) (.279) (.293) (.276)
Distributions
from net
realized gain (.01) (.0225) -- -- -- -- (.042) --
Net asset value,
end
of period $5.31 $5.14 $5.12 $5.06 $4.93 $4.93 $4.53 $5.23
Total
Return* 9.27% 6.69% 13.15%+ 8.24% 5.53% 15.39% (7.29)% 16.01%+
Ratios/Supplemental Data:
Net
assets,
end of
period
(000) $13,897 $10,688 $5,203 $52,630 $52,975 $54,186 $45,603 $34,957
Ratios to Average Net Assets:
Expenses,
including
waiver .38% .03% .00%+ .60% .44% .25% .34% .00%+
Expenses,
excluding
waiver .88% .83% 1.08%+ .68% .73% .75% .84% .75%+
Net
investment
income 5.23% 5.55% 5.44%+ 5.37% 5.59%5.95% 5.69% 4.75%+
Portfolio
turnover
rate 90.40% 72.53% 142.69% 68.50% 85.26% 98.89% 137.31% 68.10%
*Total return does not consider the effects of sales loads.
+Not annualized.
See Notes to Financial Statements.
<PAGE>
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, which presently imposes no income tax on individuals,
the interest on the municipal bonds in which each Series primarily invests also
is exempt from its state's personal income tax, if any, in the opinion of bond
counsel to the issuer. 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, Guam, 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 Moody's Investors Service, Inc. ("Moody's"--Aaa, Aa,
A, Baa), Standard & Poor's Ratings Services, Inc. ("S&P"--AAA, 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
state's 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 the market value of the issue. Neither event will require
the elimination of the issue from a Series' portfolio.
The Fund's 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.
<PAGE>
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 permitted 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 state's 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 and revenues committed to meeting interest and principal
payments of the securities. When the assets and revenues of a state's 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, 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
<PAGE>
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 10% of its net assets in RIBs at
any time during the fiscal year ended October 31, 1997. A RIB, sometimes
referred to as an inverse floater, is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another specific fixed-rate security ("specific fixed-rate security").
Changes in the interest rate on the 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 securities
similar to the specific fixed-rate security. In an effort to mitigate this risk,
the Fund purchases fixed-rate bonds which are less volatile. When interest rates
fall, not only do RIBs provide interest payments that are higher than securities
similar to the specific fixed-rate security, but their values also rise faster
than securities similar to the specific fixed-rate security.
Each Series may
invest up to 15% 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.
Each Series may borrow from banks (as defined in the Act) in amounts up to 33
1/3% of its total assets (including the amount borrowed). Each Series may borrow
up to an additional 5% of its total assets for temporary purposes and each
Series may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities.
PORTFOLIO TURNOVER. Portfolio
turnover rates for the fiscal year ended October 31, 1997 for the Florida,
Georgia, Michigan and Pennsylvania Series were 106.32%, 90.40%, 68.50% and
70.99%, respectively, compared to 167.95%, 72.53%, 85.26% and 78.30% for the
prior fiscal year. Turnover rates changed due to increases or decreases in
purchases and sales of portfolio securities relating to purchases and
redemptions of our shares and portfolio restructuring.
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.
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. Below are
brief summaries of certain factors affecting the Florida, Georgia, Michigan and
Pennsylvania Series. Also, included below is 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 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 a relatively
more important source of income.
Although Florida's dependence on the
construction and construction-related manufacturing sectors has declined in
recent years, these highly cyclical sectors still remain an important part of
Florida's economic outlook. The tourism industry also remains one of Florida's
most important industries. Although the growing sophistication of the Florida
tourism industry has, to a degree, resulted in a reduction in its seasonality,
the tourism industry still has a considerable seasonal component.
The State of
Florida is not authorized by law to issue obligations to fund governmental
operations. 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 Florida's 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. In the summer of 1997, preliminary figures on the
largest sources of employment in Georgia for 1996 were, in descending order:
wholesale and retail trade; manufacturing; government; transportation and other
public utilities; finance; insurance and real estate; contract construction and
mining. The largest sources of government revenues are the State's personal
income tax and general sales and use tax.
MICHIGAN BONDS-RISK FACTORS.
Michigan's economy remains heavily concentrated in the manufacturing sector, and
the State's automobile industry remains an important component of this sector.
Because of this link to the manufacturing sector, the State's economy is
potentially more volatile than those of other states with more diverse
economies. At $24,945, the State's per capita income stood slightly higher than
the national level of $24,426 in 1996. Renewed state economic growth has caused
the Michigan unemployment rate to remain in step or slightly below the U.S.
unemployment rate in recent years, running counter to a 27-year trend of
Michigan having a higher unemployment rate than the national average.
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 many major corporations and many small
businesses. Pennsylvania has been historically identified as a heavy-industry
state, although that reputation has changed over the last thirty years as the
industrial composition of Pennsylvania diversified with the decline of the coal,
steel and railroad industries. 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 Commonwealth's 1990 census population contained in the metropolitan
areas, which include the cities of Philadelphia and Pittsburgh.
<PAGE>
Pennsylvania's
natural resources include major deposits of coal, oil, gas and cement. Its
workforce is estimated at 5.9 million, ranking as the sixth largest labor pool
in the nation.
After experiencing operating deficits in fiscal 1990 and 1991, in each of fiscal
1992-96, the Commonwealth's General Fund recorded an operating surplus. As a
result of that surplus, the fund balance has increased since 1992 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 that of the mainland United
States, and its economic health is closely tied to the state of the U.S.
economy. Puerto Rico has a rate of unemployment greatly exceeding the U.S.
average.
Puerto Rico's economy has experienced significant growth since fiscal 1989.
Continued growth will depend on several factors, including the state of the U.S.
economy, the relative stability of the price of oil and borrowing costs.
CHANGE OF INVESTMENT OBJECTIVES AND POLICIES. We will not change our investment
objectives without shareholder approval. If we determine that our objectives can
best be achieved by a change in investment policy or strategy, we may make such
change without shareholder approval by disclosing it in our prospectus.
GENERAL
HOW MUCH MUST YOU INVEST? You may buy our shares through any independent
securities dealer having a sales agreement with Lord Abbett Distributor LLC
("Lord Abbett Distributor"), 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 ($250 minimum initial and $50 minimum subsequent),
Div-Move ($50 minimum) and Retirement Plans ($250 minimum). See "Shareholder
Services." 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 Distributor reserves the right to reject any order.
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.
BUYING SHARES THROUGH YOUR
DEALER. 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
Distributor 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
Distributor 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.
Lord Abbett Distributor 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 Distributor may from
time to time implement promotions under which Lord Abbett Distributor 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 Abbett Distributor's own
resources and will be made in the form of cash or, if permitted, 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.
<PAGE>
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.
FLORIDA SERIES. The Florida Series offers
investors Class A and Class C shares. The different classes of shares represent
investments in the same portfolio of securities but are subject to different
expenses and will be likely to have different share prices. Investors
considering an investment in the Florida Series should pay particular attention
to the sections headed "Investment in the Florida Series," "Buying Class A
Shares" and "Buying Class C Shares."
GEORGIA, MICHIGAN AND PENNSYLVANIA SERIES.
Each of these Series is a single-class series, offering Class A shares only.
Investors considering an investment in any of these Series should carefully read
the section headed "Buying Class A Shares."
INVESTMENT IN THE FLORIDA SERIES.
Investors in the Florida Series should read this section carefully to determine
which class represents the best investment option for their particular
situation.
CLASS A SHARES. If you buy Class A shares of any Series, you pay an initial
sales charge on investments of less than $1 million (or on investments for
employer-sponsored retirement plans under the Internal Revenue Code (hereinafter
referred to as "Retirement Plans") with less than 100 eligible employees). If
you purchase Class A shares of the Florida Series as part of an investment of at
least $1 million (or for Retirement Plans with at least 100 eligible employees)
in shares of one or more Lord Abbett-sponsored funds, you will not pay an
initial sales charge, but if you redeem any of those shares within 24 months
after the month in which you buy them, you may pay to the Florida Series a
contingent deferred sales charge ("CDSC") of 1%. The Florida and Pennsylvania
Series Class A shares are subject to service and distribution fees. Each fee is
currently estimated to total annually approximately .25 of 1% of the annual net
asset value of the Class A shares. Until the Rule 12b-1 Plans of the Georgia and
Michigan Series become operative, all purchases of shares of such Series
(including those over $1 million) are subject to an initial sales charge but not
to service and distribution fees.
The initial sales charge rates,
the CDSC and the Rule 12b-1 Plans applicable to the Class A shares are described
below in "Buying Class A Shares."
CLASS C SHARES. If you buy Class C shares
(offered only by the Florida Series), you pay no sales charge at the time of
purchase, but if you redeem your shares before the first anniversary of buying
them, you will normally pay the Florida Series a CDSC of 1%. Class C shares are
subject to service and distribution fees at an annual rate of 1% of the annual
net asset value of the Class C shares. The CDSC and the Rule 12b-1 Plan
applicable to the C shares are described below in "Buying Class C Shares."
WHICH
CLASS OF SHARES SHOULD YOU CHOOSE? Once you decide that the Florida Series is an
appropriate investment for you, the decision as to which class of shares is
better suited to your needs depends on a number of factors which you should
discuss with your investment professional. The Series' class-specific expenses
and the effect of the different types of sales charges on your investment will
affect your investment results over time. The most important factors are how
much you plan to invest and how long you plan to hold your investment. If your
goals and objectives change over time and you plan to purchase additional
shares, you should re-evaluate those factors to see if you should consider
another class of shares.
<PAGE>
In the following discussion, to help provide you and
your investment professional with a framework in which to choose a class, we
have made some assumptions using a hypothetical investment in the Series, using
the sales charge rates that apply to Class A and Class C shares, and considering
the effect of the higher distribution fee on Class C shares expenses (which will
affect your investment return). Of course, the actual performance of your
investment cannot be predicted and will vary, based on the Series' actual
investment returns, the operating expenses borne by each class of shares, and
the class of shares you purchase. The factors briefly discussed below are not
intended to be investment advice, guidelines or recommendations, because each
investor's financial considerations are different. The discussion below of the
factors to consider in purchasing a particular class of shares assumes that you
will purchase only one class of shares and not a combination of shares of
different classes.
HOW LONG DO YOU EXPECT TO HOLD YOUR INVESTMENT? While future financial needs
cannot be predicted with certainty, knowing how long you expect to hold your
investment will assist you in selecting the appropriate class of shares. For
example, over time, the reduced sales charges available for larger purchases of
Class A shares may offset the effect of paying an initial sales charge on your
investment, compared to the effect over time of higher class-specific expenses
on Class C shares for which no initial sales charge is paid. Because of the
effect of class-based expenses, your choice should also depend on how much you
plan to invest.
INVESTING FOR THE SHORT TERM. If you have
a short-term investment horizon (that is, you plan to hold your shares for not
more than six years), Class C shares might be the appropriate choice (especially
for investments of less than $100,000), because there is no initial sales charge
on Class C shares, and the CDSC does not apply to amounts you redeem after
holding them for one year.
However, if you plan to invest more than $100,000 for
the short term, then the more you invest and the more your investment horizon
increases toward six years, the more attractive the Class A share option may
become. This is because the annual distribution fee on Class C shares will have
a greater impact on your account over the longer term than the reduced front-end
sales charge available for larger purchases of Class A shares. For example,
Class A might be more appropriate than Class C for investments of more than
$100,000 expected to be held for 5 or 6 years (or more). For investments over
$250,000 expected to be held 4 to 6 years (or more), Class A shares may become
more appropriate than Class C. If you are investing $500,000 or more, Class A
may become more desirable as your investment horizon approaches 3 years or more.
For most investors who invest $1 million or more or for Retirement Plans with at
least 100 eligible employees, in most cases Class A shares will be the most
advantageous choice, no matter how long you intend to hold your shares.
INVESTING FOR THE LONGER TERM. If you plan to invest more than $100,000 in the
Florida Series over the long term, Class A shares will likely be more
advantageous than Class C shares, as discussed above, because of the effect of
the expected lower expenses for Class A shares and the reduced initial sales
charges available for larger investments in Class A shares under the Fund's
Rights of Accumulation.
Of course, these examples are based on approximations of
the effect of current sales charges and expenses on a hypothetical investment
over time, and should not be relied on as rigid guidelines.
You should discuss
your purchase order for a specific class of shares with your investment
professional.
ARE THERE DIFFERENCES IN ACCOUNT FEATURES THAT MATTER TO YOU? Some account
features are available in whole or in part to Class A and Class C shareholders.
Other features (such as Systematic Withdrawal Plans) might not be advisable for
Class C shareholders during the first year of share ownership (due to the CDSC
on withdrawals during that year). You should carefully review how you plan to
use your investment account before deciding which class of shares you buy. For
example, the dividends payable to Class C shareholders will be reduced by the
expenses borne solely by that class, such as the higher distribution fee to
which Class C shares are subject.
<PAGE>
HOW DOES IT AFFECT
PAYMENTS TO MY BROKER? A salesperson, such as a broker, or any other person who
is entitled to receive compensation for selling Fund shares, may receive
different compensation for selling one class than for selling another class. As
discussed in more detail below, such compensation is primarily paid at the time
of sale in the case of Class A shares and is paid over time, so long as shares
remain outstanding, in the case of Class C shares. It is important that
investors understand that the primary purpose of the CDSC and distribution fee
for Class C shares is the same as the primary purpose of the front-end sales
charge on sales of Class A shares: to compensate brokers and other persons
selling such shares. The CDSC, if payable, reduces the Class C distribution fee
expenses for the Fund and Class C shareholders.
BUYING CLASS A SHARES (ALL
SERIES). For each Series, the offering price of Class A shares is based on the
per-share net asset value next computed after your order is accepted, plus a
sales charge as follows:
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
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 the Georgia and Michigan 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
+Authorized institutions receive concessions on purchases made by a
retirement plan or other qualified purchaser within a 12-month period (beginning
with the first net asset value purchase) as follows: 1.00% on purchases of $5
million, 0.55% of the next $5 million, 0.50% of the next $40 million and 0.25%
on purchases over $50 million. See "Class A Rule 12b-1 Plan" below.
CLASS A SHARE VOLUME DISCOUNTS. This section describes
several ways to qualify for a lower sales charge when purchasing Class A shares
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 Class A share purchase in
the Fund with share 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"), any series of the Lord Abbett Research Fund if not offered to the
general public ("LARF") and Lord Abbett U.S. Government Securities Money Market
Fund ("GSMMF"), except for existing holdings in GSMMF which are attributable to
shares exchanged from a Lord Abbett-sponsored fund.)
(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 purchaser's 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.
<PAGE>
CLASS A SHARE NET
ASSET VALUE PURCHASES. Each Series' Class A 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 Distributor 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 or Lord Abbett Distributor
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 trustee's or employee's spouse
(including the surviving spouse of a deceased trustee or employee). The terms
"trustees" and "employees of Lord Abbett" also include other family members and
retired trustees and employees. Our Class A shares also may be purchased at net
asset value (a) at $1 million or more with respect to the Florida and
Pennsylvania Series, (b) with dividends and distributions from Class A shares of
other Lord Abbett-sponsored funds, except for dividends and distributions on
shares of LARF, LAEF and LASF, (c) under the loan feature of the Lord
Abbett-sponsored prototype 403(b) plan for share purchases representing the
repayment of principal and interest, (d) by certain unaffiliated authorized
brokers, dealers, registered investment advisers or other financial institutions
who have entered into an agreement with Lord Abbett Distributor in accordance
with certain standards approved by Lord Abbett Distributor, providing
specifically for the use of our Class A shares in particular investment products
made available for a fee to clients of such brokers, dealers, registered
investment advisers and other financial institutions ("mutual fund wrap fee
programs") (e) by employees, partners and owners of unaffiliated consultants and
advisers to Lord Abbett, Lord Abbett Distributor or Lord Abbett-sponsored funds
who consent to such purchase if such persons provide services to Lord Abbett or
Lord Abbett Distributor on such funds on a continuing basis and are familiar
with such funds, and (f) through retirement plans with at least 100 eligible
employees.
There are no initial or subsequent minimum investment requirements, and 12b-1
fees are waivable for the above-mentioned mutual fund wrap-fee programs.
Our Class A 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.
CLASS A RULE 12B-1 PLAN. Each Series has adopted a Class
A share Rule 12b-1 Plan (the "A Plans," each an "A Plan") which authorizes Lord
Abbett to pay fees to authorized institutions (except as to certain accounts for
which tracking data is not available) in order to provide additional incentives
for them (a) to provide continuing information and investment services to their
Class A shareholder accounts and otherwise to encourage those accounts to remain
invested in the Series and (b) to sell Class A shares of the Series. The A Plan
fees indicated below will become operative on the first day (the "operative
date") of the calendar quarter subsequent to a Series' net assets reaching $100
million. The Fund cannot estimate when the net assets will reach the required
level for the A Plans of the Georgia and Michigan Series. The Florida and
Pennsylvania Series A Plans are operative. Under the A Plans, in order to save
on the expense of shareholders' meetings and to provide flexibility to the Board
of Trustees, the Board, including a majority of the outside trustees who are not
"interested persons" of the Fund as defined in the Investment Company Act of
1940, is authorized to approve annual fee payments from our Class A assets of up
to 0.50 of 1% of the average net asset value of such assets consisting of
distribution and service fees, each at a maximum annual rate not exceeding 0.25
of 1% (the "Fee Ceiling").
Under the A Plans, the Board has approved payments
(on and after the operative date of a plan) by the Fund to Lord Abbett
Distributor, which uses or passes on to authorized institutions (1) an annual
service fee (payable quarterly) of .25% of the average daily net asset value of
the Class A shares serviced by authorized institutions (.15% of the average
daily net asset value of such shares serviced before the operative date of a
plan), and (2) a one-time distribution fee of up to 1% (reduced according to the
following schedule: 1% of the first $5 million, .55% of the next $5 million,
.50% of the next $40 million and .25% over $50 million), payable at the time of
sale on all Class A shares sold during any 12-month period starting from the day
of the first net asset value sale (i) at the $1 million level by authorized
institutions, including sales qualifying at such level under the rights of
accumulation and statement of intention privileges, or (ii) through Retirement
Plans with at least 100 eligible employees.
<PAGE>
In addition, the Board has approved
for those authorized institutions which qualify a supplemental annual
distribution fee equal to 0.10% of the average daily net asset value of the
Class A shares serviced by authorized institutions which have a program for the
promotion and retention of such shares satisfying Lord Abbett Distributor. Class
A shares held pursuant to a satisfactory program would, for example, (i)
constitute a significant percentage of the Fund's net assets, (ii) be held for a
substantial length of time, and/or (iii) have a lower than average redemption
rate.
Under the A Plans, Lord Abbett Distributor is permitted to use payments received
to provide continuing services to Class A shareholder accounts not serviced by
authorized institutions and, with Board approval, to finance any activity which
is primarily intended to result in the sale of Class A shares. Any such payments
are subject to the Fee Ceiling. Any payments under the A Plan not used by Lord
Abbett Distributor in this manner are passed on to authorized institutions.
Holders of shares on which the 1% sales distribution fee has been paid may be
required to pay to the Series, on behalf of its Class A shares, a CDSC of 1% of
the original cost or the then net asset value, whichever is less, of all Class A
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. (An exception is made for redemptions by Retirement
Plans due to any benefit payment such as Plan loans, hardship withdrawals,
death, retirement or separation from service with respect to plan participants
or the distribution of any excess contributions.) If the Class A 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.
BUYING CLASS C SHARES
(FLORIDA SERIES ONLY). Class C shares are sold at net asset value per share
without an initial sales charge. However, if Class C shares are redeemed for
cash before the first anniversary of their purchase, a CDSC of 1% may be
deducted from the redemption proceeds. The charge will be assessed on the lesser
of the net asset value of the shares at the time of redemption or the original
purchase price. The Class C CDSC is paid to the Florida Series to reimburse it,
in whole or in part, for the service and distribution fee payment made by the
Florida Series at the time such shares were sold, as described below.
To
determine whether the CDSC applies to a redemption, the Florida Series redeems
shares in the following order: (1) shares acquired by reinvestment of dividends
and capital gains distributions, (2) shares held for one year or more, and (3)
shares held the longest before the first anniversary of their purchase. If Class
C shares are exchanged into the same class of another Lord Abbett-sponsored fund
and subsequently redeemed before the first anniversary of their original
purchase, the charge will be collected by the other fund on behalf of the
Florida Series' Class C shares. The Series will collect such a charge for other
Lord Abbett-sponsored funds in a similar situation.
CLASS C RULE 12B-1 PLAN. The
Florida Series has adopted a Class C share Rule 12b-1 Plan (the "C Plan") under
which (except as to certain accounts for which tracking data is not available)
the Florida Series pays authorized institutions through Lord Abbett Distributor
(1) a service fee and a distribution fee, at the time shares are sold, not to
exceed 0.25 and 0.75 of 1%, respectively, of the net asset value of such shares
and (2) at each quarter-end after the first anniversary of the sale of shares,
fees for services and distribution at annual rates not to exceed 0.25 and 0.75
of 1%, respectively, of the average annual net asset value of such shares
outstanding (payments with respect to shares not outstanding during the full
quarter to be prorated). These service and distribution fees are for purposes
similar to those mentioned above with respect to the A Plans. Sales in clause
(1) exclude shares issued for reinvested dividends and distributions and shares
outstanding in clause (2) include shares issued for reinvested dividends and
distributions after the first anniversary of their issuance. Lord Abbett
Distributor may retain from the quarterly distribution fee, for the payment of
distribution expenses incurred directly by it, an amount not to exceed .10% of
the average annual net asset value of such shares outstanding.
<PAGE>
SHAREHOLDER SERVICES
We offer the following shareholder services: TELEPHONE
EXCHANGE PRIVILEGE: Shares of any Series may be exchanged, without a service
charge (a) for those of the same class of any other Series or any available Lord
Abbett-sponsored fund, except for (i) LAEF, LASF and LARF 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 and (b) for shares of any
authorized institution's affiliated money market fund satisfying Lord Abbett
Distributor as to certain omnibus account and other criteria (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 Series' 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 ("SWP"):
Except for retirement plans for which there is no such minimum, 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. For Class C shares (Florida Series only), redemption proceeds
due to a SWP will be derived from the following sources in the following order:
(1) shares acquired by reinvestment of dividends and capital gains, (2) shares
held for one year or more, and (3) shares held the longest before the first
anniversary of their purchase.
DIV-MOVE: You can invest the dividends paid on
your account ($50 minimum) into another 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. Such dividends are not subject to a CDSC. You should read the
prospectus of the other fund before investing.
INVEST-A-MATIC: Invest-A-Matic
allows fixed, periodic investments ($250 minimum initial and $50 subsequent
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 single copy of an annual or
semi-annual report will be 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>
OUR MANAGEMENT
Our business is managed by our officers on a day-to-day basis
under the overall direction of our Board of Trustees with the advice of Lord
Abbett. We employ Lord Abbett as investment manager for each Series, pursuant to
a Management Agreement. Lord Abbett has been an investment manager for over 67
years and currently manages approximately $25 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
twelve other funds having various investment objectives and also advises other
investment clients. Zane E. Brown, Lord Abbett partner and its Director of Fixed
Income, is primarily responsible for the day-to-day management of the Fund. Mr.
Brown delegates management duties to other Lord Abbett employees who may be Fund
officers.
Under the Management Agreement for the last fiscal year, we paid Lord Abbett a
monthly fee at the annual rate of .50 of 1% of average daily net assets of the
Florida, Pennsylvania and Michigan Series and .00 of 1% of such assets for the
Georgia Series.
The Management 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 $50million ("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 Fund's
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. 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, and shares of each class have equal
rights as to voting, dividends, assets and liquidation, except for differences
resulting from class-specific expenses.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Dividends from net investment
income are declared daily and paid monthly. They 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 rein- vestment 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. You begin earning dividends on the business day on which
payment for the purchase of your shares is received.
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. Any capital gains distribution
will be made annually in December. You may take it in cash or reinvest it in
additional shares at net asset value without a sales charge.
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.
<PAGE>
We intend to continue to
meet the requirements of Subchapter M of the Internal Revenue Code. We will try
to distribute to shareholders all our net investment income and net realized
capital gains, so as to avoid the necessity of the Fund paying federal income
tax. Distributions by the Fund of any net long-term capital gains will be
taxable to a shareholder as a long-term capital gains regardless of how long the
shareholder has held the shares. Under recently enacted legislation, the maximum
tax rate for a U.S. individual, estate or trust is reduced to 20% for
distributions derived from the sale of assets held more than 18 months. (If the
taxpayer is in the 15% tax bracket, the rate is 10%.) For distributions derived
from the sale of assets held by the Fund for between 12 and 18 months, the tax
rate remains at 28% (15% if the taxpayer is in the 15% tax bracket).
Shareholders 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 fund) 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 recipient's adjusted
gross income (plus miscellaneous adjustments), tax-exempt interest income and
one-half of Social Security income exceeds $25,000 for individuals ($32,000 for
individuals filing a joint return). The tax will be imposed on up to 85% of such
benefits only when such sum exceeds $34,000 for individuals ($44,000 for
individuals filing a joint return). 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.
<PAGE>
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.
MICHIGAN TAXES. Dividends paid by the Michigan
Series to a Michigan resident will not be subject to the Michigan 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 income tax. 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. 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 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 paid 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, corporate 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 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.
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.
<PAGE>
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.
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 Abbett's 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 (i) without the payment of a front-end sales charge or
(ii) with reimbursement for the payment of any CDSC. 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.
PERFORMANCE Lord Abbett Tax-Free Income Trust completed its fiscal year on
October 31, 1997 with aggregate net assets of $305,512,282.
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 fiscal year, including market
conditions and investment strategies pursued by the Fund's management.
We took
advantage of the higher interest rate environment by increasing our position of
higher yielding, long-term municipal bonds at the end of March. Because the
movement of bonds' yields and prices are inversely related, we believe these
securities will appreciate as the economy slows and long-term interest rates
begin to come down. As always, the Trust invested in high-quality bonds with
good call protection. Call protection has become increasingly important given
the continued decrease in the supply of municipal bonds. Essential service
revenue bonds, which finance services that typically are in constant demand,
remain an important part of the Fund.
YIELD AND TOTAL RETURN. Yield,
tax-equivalent yield and total return data may from time to time be included in
advertisements about the Series. Each class of shares calculates its "yield" by
dividing 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 class'
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 each class' yield that
is not tax exempt. The yield and tax-equivalent yield of each class will differ
because of the different expenses (including actual 12b-1 fees) of each class of
shares. The yield data represents a hypothetical investment return on the
portfolio, and does not measure an investment return based on dividends actually
paid to shareholders. To show that return, a dividend distribution rate may be
calculated. Dividend distribution rate is calculated by dividing the dividends
of a class derived from net investment income during a stated period by the
maximum offering price on the last day of the period. Yields and dividend
distribution rate for Class A shares reflect the deduction of the maximum
initial sales charge, but may also be shown based on the Series' net asset value
per share.
<PAGE>
Yield for Class C shares does not reflect the deduction of the CDSC.
"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 each Series at
the maximum public offering price. When total return is quoted for Class A
shares, it includes the payment of the maximum initial sales charge. When total
return is shown for Class C shares, it reflects the effect of the applicable
CDSC. 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 (front-end or
level) would be reduced if such sales charge were used. Quotations of 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>
The performance of Class A shares of the Florida Series shown in the comparison
below will be greater than or less than that shown for Class C shares based on
the differences in sales charges and fees paid by shareholders investing in
different classes. Comparison of changes in value of a $10,000 investment in
Class A shares of Florida Series, assuming reinvestment of all dividends and
distributions, Lipper's Average of Florida tax-free funds and the Lehman
Municipal Bond Index
FUND CLASS A SHARE AT MAXIMUM LIPPER'S AVERAGE LIPPER'S
NET ASSETT VALUE OFFERING PRICE FL TAX-FREE FUNDS MUNI BOND INDEX
9/25/91 10,057 9,575 10,000 10,000
1991 10,726 10,211 10,886 10,090
1992 12,682 12,073 10,934 10,937
1993 11,664 11,103 12,475 12,476
1994 13,323 12,684 11,869 12,043
1995 13,869 13,203 13,316 14,817
1996 14,856 14,143 13,984 15,697
Average Annual Total Return
for Class A Shares(1)
Life of Class
1 Year 5 Years 9/25/91-10/31/97
2.00% 5.69% 5.86%
Average Annual Total Return
for Class C Shares(5)
Life of Class
1 Year 7/15/96-10/31/97
6.33% 7.55%
Comparison of changes in value of a $10,000 investment in Class A shares of
Pennsylvania Series, assuming reinvestment of all dividends and distributions,
Lipper's Average of Pennsylvania tax-free funds and the Lehman Municipal Bond
Index
FUND CLASS A SHARE AT MAXIMUM LIPPER'S AVERAGE LIPPER'S
NET ASSETT VALUE OFFERING PRICE PA TAX-FREE FUNDS MUNI BOND INDEX
2/3/92 10,468 9,966 10,000 10,000
1992 12,452 11,855 10,680 10,558
1993 11,489 10,937 11,967 12,044
1994 13,215 12,581 11,509 12,165
1995 13,966 13,296 12,864 15,938
1996 15,136 14,409 13,542 16,885
Average Annual Total Return
for Class A Shares(1)
Life of Series
1 Year 5 Years 2/3/92-10/31/97
3.20% 6.59% 6.57%
Comparison of changes in value of a $10,000 investment in Class A shares of
Michigan Series, assuming reinvestment of all dividends and distributions,
Lipper's Average of Michigan tax-free funds and the Lehman Municipal Bond Index
FUND CLASS A SHARE AT MAXIMUM LIPPER'S AVERAGE LIPPER'S
NET ASSETT VALUE OFFERING PRICE PA TAX-FREE FUNDS MUNI BOND INDEX
12/1/92 11,600 11,044 10,000 10,000
1993 10,754 10,238 11,190 11,207
1994 12,409 11,814 10,812 12,016
1995 13,095 12,467 12,638 14,796
1996 14,173 13,492 13,265 15,675
Average Annual Total Return
for Class A Shares(1)
Life of Series
1 Year 12/1/92-10/31/97
3.00% 6.28%
Comparison of changes in value of a $10,000 investment in Class A shares of
Georgia Series, assuming reinvestment of all dividends and distributions,
Lipper's Average of Georgia tax-free funds and the Lehman Municipal Bond Index.
FUND CLASS A SHARE AT MAXIMUM LIPPER'S AVERAGE LIPPER'S
NET ASSETT VALUE OFFERING PRICE PA TAX-FREE FUNDS MUNI BOND INDEX
1994 10,000 10,000
1995 11,315 10,772 11,391 11,445
1996 12,071 11,492 11,996 12,125
1997 13,189 12,556 12,972 13,363
Average Annual Total Return
for Class A Shares(1)
Life of Series
1 Year 12/27/94-10/31/97
4.00% 8.31%
(1)Total return is the percent change in value, after deduction of the maximum
initial sales charge of 4.75%, applicable to Class A shares with all dividends
and distributions reinvested for the periods shown ending October 31, 1996 using
the SEC-required uniform method to compute such return. Except for Florida, a
portion of each Series' management fee has been waived. (2)Data reflects the
deduction of the maximum initial sales charge of 4.75%, applicable to Class A
shares. (3)Source: Lipper Analytical Services. (4)Performance numbers for the
unmanaged 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. (5)Performance reflects NAV.
<PAGE>
LORD ABBETT
Statement of Additional Information March 1, 1998
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 Distributor LLC
("Lord Abbett Distributor"), The General Motors Building, 767 Fifth Avenue, New
York, New York 10153-0203. This Statement relates to, and should be read in
conjunction with, the Prospectus dated March 1, 1998.
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
(each a "Series"). The Florida Series consists of two classes of shares: Class A
and Class C. The other Series consist of a single class of shares only: Class A.
Although no present plans exist, further series and/or classes 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 class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, the Rule exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of the Rule.
Shareholder inquiries should be made by writing directly to the Fund or by
calling 800-821-5129. In addition, you can make inquiries through your dealer.
TABLE OF CONTENTS Page
1. Investment Policies 2
2. Trustees and Officers 9
3. Investment Advisory and Other Services 11
4. Portfolio Transactions 13
5. Purchases, Redemptions
and Shareholder Services 14
6. Taxes 19
7. Risk Factors Regarding Investments in Florida, Georgia
Michigan, Pennsylvania and Puerto Rico Municipal Bonds 20
8. Past Performance 25
9. Further Information About the Trust 26
10. Financial Statements 27
<PAGE>
1.
Investment Policies
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Series may not: (1) borrow money (except that (i) the Series may borrow
from banks (as defined in the Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may borrow up to an additional 5%
of its total assets for temporary purposes, (iii) the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law); (2) pledge its assets (other than to
secure borrowings or to the extent permitted by the Series' investment policies
as permitted by applicable law; (3) engage in the underwriting of securities
except pursuant to a merger or acquisition or to the extent that, in connection
with the disposition of its portfolio securities, it may be deemed to be an
underwriter under federal securities laws; (4) make loans to other persons,
except that the acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, commercial paper,
pass-through instruments, certificates of deposit, bankers acceptances,
repurchase agreements or any similar instruments shall not be subject to this
limitation, and except further that each Series may lend its portfolio
securities, provided that the lending of portfolio securities may be made only
in accordance with applicable law; (5) buy or sell real estate (except that each
Series may invest in securities directly or indirectly secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein), commodities or commodity contracts (except to the extent the
Fund may do so in accordance with applicable law and without registering as a
commodity pool operator under the Commodity Exchange Act as, for example, with
futures contracts); (6) invest more than 25% of its assets, taken at market
value, in the securities of issuers in any particular industry (excluding
tax-exempt securities financing facilities in the same industry or issued by
nongovernmental users and securities of the U.S. Government, its agencies and
instrumentalities); or (7) issue senior securities to the extent such issuance
would violate applicable law.
With respect to the restrictions mentioned herein, compliance therewith will not
be affected by change in the market value of portfolio securities but will be
determined at the time of purchase or sale of such securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. In addition to the investment
restrictions above which cannot be changed without shareholder approval, we also
are subject to the following non-fundamental investment policies which may be
changed by the Board of Trustees without shareholder approval. Each Series may
not: (1) borrow in excess of 33 1/3% of its total assets (including the amount
borrowed), and then only as a temporary measure for extraordinary or emergency
purposes; (2) make short sales of securities or maintain a short position except
to the extent permitted by applicable law; (3) invest knowingly more than 15% of
its net assets (at the time of investment) in illiquid securities, except for
securities qualifying for resale under Rule 144A of the Securities Act of 1933
deemed to be liquid by the Board of Trustees; (4) invest in securities of other
investment companies, except as permitted by applicable law; (5) invest in
securities of issuers which, with their predecessors, have a record of less than
three years of continuous operation, if more than 5% of such Series' total
assets would be invested in such securities (this restriction shall not apply to
mortgaged-backed securities, asset-backed securities or obligations issued or
guaranteed by the U. S. government, its agencies or instrumentalities); (6) hold
securities of any issuer when more than 1/2 of 1% of the issuer's securities are
owned beneficially by one or more of the Series' officers or trustees or by one
or more partners of the Fund's underwriter or investment adviser if these owners
in the aggregate own beneficially more than 5% of the securities of such issuer;
(7) invest in warrants if, at the time of acquisition, its investment in
warrants, valued at the lower of cost or market, would exceed 5% of such Series'
total assets (included within such limitation, but not to exceed 2% of such
Series' total assets, are warrants which are not listed on the New York or
American Stock Exchange or a major foreign exchange; (8) invest in real estate
limited partnership interests or interests in oil, gas or other mineral leases,
or exploration or development programs, except that such Series may invest in
securities issued by companies that engage in oil, gas or other mineral
exploration or development activities; (9) write, purchase or sell puts, calls,
straddles, spreads or combinations thereof, except to the extent permitted in
the Fund's prospectus and statement of additional information, as they may be
amended from time to time; or (10) buy from or sell to any of its officers,
trustees, employees, or its investment adviser or any of its officers, trustees,
partners or employees, any securities other than shares of beneficial interest
in a Series of the Fund.
<PAGE>
With respect to each Series, there is no fundamental policy or restriction with
respect to diversification, but each Series will be required to meet the
diversification rules under Subchapter M of the Internal Revenue Code.
While each of the Series may take short-term gains if deemed appropriate,
normally, the Series will hold securities in order to realize interest income
exempt from federal income tax and, where applicable, its state's personal
income tax, consistent with reasonable risks. For the fiscal year ended October
31, 1997 the portfolio turnover rates for the Florida, Georgia, Michigan and
Pennsylvania Series were 106.32%, 90.40%, 68.50% and 70.99%, respectively,
versus 167.95%, 72.53%, 85.26% and 78.30%, respectively for the prior year. 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)
Municipal Bonds
In general, municipal bonds are debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and Puerto Rico and by their political subdivisions, agencies and
instrumentalities. Municipal bonds are issued to obtain funds for various public
purposes, including the construction of bridges, highways, housing, hospitals,
mass transportation, schools, streets and water and sewer works. They may be
used to refund outstanding obligations, to obtain funds for general operating
expenses, or to obtain funds to lend to other public institutions and facilities
and in anticipation of the receipt of revenue or the issuance of other
obligations. In addition, the term "municipal bonds" includes certain types of
"private activity" bonds including industrial development bonds issued by public
authorities to obtain funds to provide privately-operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain facilities for water supply, gas, electricity, or sewerage or solid
waste disposal. Under the Tax Reform Act of 1986, as amended, substantial
limitations have been imposed on new issues of municipal bonds to finance
privately-operated facilities. The interest on municipal bonds generally is
excludable from gross income for federal income tax purposes of most investors.
The two principal classifications of municipal bonds are "general obligation"
and limited obligation or "revenue bonds." General obligation bonds are secured
by the pledge of the faith, credit and taxing power of the municipality for the
payment of principal and interest. The taxes or special assessments that can be
levied for the payment of debt service may be limited or unlimited as to rate or
amount. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. "Private activity" bonds,
including industrial development bonds are, in most cases, revenue bonds and
generally do not constitute the pledge of the faith, credit or taxing power of
the municipality. The credit quality of such municipal bonds usually is directly
related to the credit standing of the user of the facilities. There are
variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on municipal bonds are dependent on a variety of factors, including
general market conditions, supply and demand, general conditions of the
municipal bond market, size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("Standard &
Poor's") and Fitch Investors Service ("Fitch") represent their opinions as to
the quality of the municipal bonds which they undertake to rate. It should be
emphasized, however, that such ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields when purchased in the open market,
while municipal bonds of the same maturity and coupon with different ratings may
have the same yield.
<PAGE>
DESCRIPTION OF FOUR HIGHEST MUNICIPAL BOND RATINGS
Moody's describes its four highest ratings for municipal bonds as follows:
" Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well."
Standard & Poor's describes its four highest ratings for municipal bonds as
follows:
"AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions are changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation."
Fitch describes its four highest ratings for municipal bonds as follows:
"AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
<PAGE>
BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category."
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS
GENERAL. Each Series may engage in futures and options transactions in
accordance with its investment objective and policies. 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, frequently there are differences in the rate of such
movements and temporary dislocations. Accordingly, the use of a financial
futures contract on a taxable security or a taxable securities index may involve
a greater risk of an imperfect correlation between the price movements of the
futures contract and of the municipal bond being hedged than when using a
financial futures contract on a municipal bond or a municipal bond index. In
addition, the market prices of futures contracts may be affected by certain
factors. For example, if participants in the futures market elect to close out
their contracts through offsetting transactions
<PAGE>
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
<PAGE>
secured put writer incurs an unrealized loss to the extent that the current
market value of the underlying security is less than the exercise price of the
put option, minus the premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the Prospectus, each Series may deal
in over-the-counter traded options ("OTC options"). OTC options differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation and there is a risk of
nonperformance by the dealer, as a result of the insolvency of such dealer or
otherwise, in which event the Fund 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 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
<PAGE>
to options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike security options, all settlements are in cash
and gain or loss depends upon price movements in the market generally (or in a
particular industry or segment of the market), rather than upon price movements
in individual securities. Price movements in securities which a Series owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Series bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.
When a Series writes an option on a securities index, it will be required to
deposit with its custodian, and mark-to-market eligible securities equal in
value to at least 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where a Series writes a call
option on a securities index at a time when the contract value exceeds the
exercise price, the Series will segregate and mark-to-market until the option
expires or is closed out, cash or equivalents equal in value to such excess.
Options on futures contracts and index options involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Also, an option purchased by a Series may expire worthless, in which case the
Series would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. Each Series may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Series to purchase or sell
securities, with payment and delivery to take place in the future, in order to
secure what is considered to be an advantageous price or yield to the Series at
the time of entering into the transaction. When a Series enters into a delayed
delivery purchase, it becomes obligated to purchase securities and it has all
the rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed-income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Series makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for the
purchase and the value of the security in determining its net asset value.
Likewise, at the time a Series makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. Each Series, generally, has the ability to close out a purchase
obligation on or before the settlement date, rather than take delivery of the
security.
To the extent a Series engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for investment leverage or to
speculate in interest rate changes. A Series will only make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, but each Series reserves the
right to sell these securities before the settlement date if deemed advisable.
REGULATORY RESTRICTIONS. To the extent required to comply with 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
<PAGE>
or options thereon are purchased to protect against a price increase on
securities intended to be purchased later, it is anticipated that at least 75%
of such intended purchases will be completed. When other futures contracts or
options thereon are purchased, the underlying value of such contracts will at
all times not exceed the sum of: (1) accrued profit on such contracts held by
the broker; (2) cash or high-quality money market instruments set aside in an
identifiable manner and (3) cash proceeds from investments due in 30 days.
2.
Trustees and Officers
The following trustees are partners of Lord, Abbett & Co. ("Lord Abbett"), The
General Motors Building, 767 Fifth Avenue, New York, New York 10153-0203. They
have been associated with Lord Abbett for over five years and are also officers
and/or directors or trustees of the twelve other Lord Abbett-sponsored funds
including those described under "Purchases, Redemptions and Shareholder
Services." They are "interested persons" as defined in the Act, and as such, may
be considered to have an indirect financial interest in the Rule 12b-1 Plans
described in the Prospectus.
Robert S. Dow, age 52, Chairman and President
E. Wayne Nordberg, age 59 Vice President
The following outside trustees are also directors or trustees of the twelve
other Lord Abbett-sponsored funds referred to above.
E. Thayer Bigelow
Courtroom Television Network
600 Third Avenue
New York, New York
Chief Executive Officer of Courtroom Television Network. Formerly President and
Chief Executive Officer of Time Warner Cable Programming, Inc. Prior to that,
formerly President and Chief Operating Officer of Home Box Office, Inc. Age 56.
Stewart S. Dixon
Wildman, Harrold, Allen & Dixon
225 W. Wacker Drive (Suite 2800)
Chicago, Illinois
Partner in the law firm of Wildman, Harrold, Allen & Dixon. Age 67.
John C. Jansing 162 S. Beach Road Hobe Sound, Florida Retired. Former Chairman
of Independent Election Corporation of America, a proxy tabulating firm. Age 72.
C. Alan MacDonald
Directorship Inc.
8 Sound Shore Drive
Greenwich, Connecticut
Managing Director of Directorship Inc., a consultancy in board management and
corporate governance. Formerly General Partner of The Marketing Partnership,
Inc., a full service marketing consulting firm (1994 - 1997). Prior to that, he
was Chairman and Chief Executive Officer of Lincoln Snacks, Inc., manufacturer
of branded snack foods (1992 - 1994). His career spans 36 years at Stouffers and
Nestle with 18 of the years as Chief Executive Officer. Currently serves as
Director of DenAmerica Corp., J.B. Williams Company, Inc., Fountainhead Water
Company and Exigent Diagnostics. Age 64.
<PAGE>
Hansel B. Millican, Jr.
Rochester Button Company
1100 Noblin Avenue
South Boston, Virginia
President and Chief Executive Officer of Rochester Button Company. Age 69.
Thomas J. Neff
Spencer Stuart U.S.
277 Park Avenue
New York, New York
Chairman of Spencer Stuart U.S., an executive search consulting firm. Age 60.
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, 1997
(1) (2) (3) (4)
Pension or For Year Ended
Retirement Benefits December 31, 1997
Accrued by the Total Compensation
Aggregate Fund and Accrued by the Fund and
Compensation Twelve Other Lord Twelve Other Lord
Accrued by Abbett-sponsored Abbett-sponsored
Name of Director the Fund1 Funds2 Funds3
<S> <C> <C> <C>
E. Thayer Bigelow $1,208 $17,068 $56,000
Stewart S. Dixon $1,187 $32,190 $55,000
John C. Jansing $1,187 $45,085 $55,000
C. Alan MacDonald $1,234 $30,703 $57,400
Hansel B. Millican, Jr. $1,198 $37,747 $55,000
Thomas J. Neff $1,203 $19,853 $56,000
<FN>
1. Outside directors' fees, including attendance fees for board and committee
meetings, are allocated among all Lord Abbett-sponsored funds based on the net
assets of each fund. A portion of the fees payable by the Fund to its outside
directors is being deferred under a plan that deems the deferred amounts to be
invested in shares of the Fund for later distribution to the directors.
2. The amounts in Column 3 were accrued by the Lord Abbett-Sponsored Funds for
the 12 months ended October 31, 1997 with respect to the equity based plans
established for independent directors in 1996. This plan supersedes a previously
approved retirement plan for all future directors. Current directors had the
option to covert their accrued benefits under the retirement plan. All of the
outside directors except one made such an election. Each plan also provides for
a pre-retirement death benefit and actuarially reduced joint-and-survivor
spousal benefits.
3. This column shows aggregate compensation, including trustees 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, 1997. The amounts of the aggregate compensation payable by the Fund
as of October 31, 1997 deemed invested in Fund shares, including dividends
reinvested and changes in net asset value applicable to such deemed investments,
were: Mr. Bigelow, $3,670 ; Mr. Dixon, $ 2,595; Mr. Jansing, $ 5,976 ; Mr.
MacDonald, $ 2,510; Mr. Millican, $ 5,991, and Mr. Neff, $ 5,994. If the amounts
deemed invested in Fund shares were added to each director's actual holdings of
Fund shares as of October 31, 1997, each would own the following: Mr. Bigelow,
737 shares; Mr. Dixon, 524 shares; Mr. Jansing, 1,203 shares; Mr. McDonald, 507
shares; Mr. Millican, 1,206 shares; and Mr. Neff, 1,196 shares.
4. Mr. Jansing chose to continue to receive benefits under the retirement plan
which provides that outside directors (Trustees) may receive annual retirement
benefits for life equal to their final annual retainer following retirement at
or after age 72 with at least ten years of service. This, if Mr. Jansing were to
retire and the annual retainer payable by the funds were the same as it is
today, he would receive annual retirement benefits of $50,000.
</FN>
</TABLE>
<PAGE>
Except where indicated, the following executive officers of the Fund have been
associated with Lord Abbett for over five years. Of the following, Messrs.
Allen, Brown, Carper, Ms. Foster, Messrs. Hilstad, Morris, Noelke and Walsh are
partners of Lord Abbett; the others are employees: Zane Brown, age 46, Executive
Vice President; Paul A. Hilstad, age 55, Vice President and Secretary (with Lord
Abbett since 1995; formerly Senior Vice President and General Counsel of
American Capital Management & Research, Inc.); John Mousseau, age 41; Philip
Fang, age 32, Executive Vice Presidents; Stephen I. Allen, age 44; Zane E.
Brown, age 44; Daniel E. Carper, age 46; Daria L. Foster, age 43; Lawrence H.
Kaplan, age 41 (with Lord Abbett since 1997 - formerly Vice President and Chief
Counsel of Salomon Brothers Asset Management Inc from 1995 to 1997, prior
thereto Senior Vice President, Director and General Counsel of Kidder Peabody
Asset Management, Inc.); Thomas F. Konop, age 55; Robert G. Morris, age 53,
Robert J. Noelke, age 41; A. Edward Oberhaus, age 38; Keith F. O'Connor, age 42;
John J. Walsh, age 61, Vice Presidents; and Donna M. McManus, age 37, Treasurer
(with Lord Abbett since 1996, formerly a Senior Manager at Deloitte & Touche
LLP)..
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 February 28, 1998 our officers and trustees as a group owned less than
2.6%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. Ten of the twelve general partners of Lord Abbett, all of
whom are officers and/or trustees of the Fund, are: Stephen I. Allen, Zane E.
Brown, Daniel E. Carper, Robert S. Dow, Daria L. Foster, Paul A. Hilstad, Robert
G. Morris, Robert J. Noelke, 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 other general partners of Lord Abbett who are neither
officers nor directors of the Fund are W. Thomas Hudson and Michael McLaughlin.
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%. For the Florida Series, this fee is
allocated among the Class A and Class C shares based on the class' proportionate
share of the average daily net assets of the Series. In addition, we pay all
expenses not expressly assumed by Lord Abbett, including without limitation
12b-1 expenses; outside trustees' fees and expenses; association membership
dues; legal and auditing fees; taxes; transfer and dividend disbursing agent
fees; shareholder servicing costs; expenses relating to shareholder meetings;
expenses of preparing, printing and mailing share certificates and shareholder
reports; expenses of registering our shares under federal and state securities
laws; expenses of preparing, printing and mailing prospectuses to existing
shareholders; insurance premiums and brokerage and other expenses connected with
executing portfolio transactions.
Although not obligated to do so, Lord Abbett may waive all or part of its
management fees and may assume other expenses of the Series. Subsequently, Lord
Abbett may charge these fees and/or omit these subsidies on a partial or
complete basis.
The Fund's Management Agreement provides for each Series to repay Lord Abbett
without interest for subsidized expenses on and after the first day of the
calendar quarter after the net assets of a Series first reaches $50 million (the
"commencement date") and until the net assets reach $100 million, provided the
ratio of operating expenses of the Series (determined before taking into account
any fee waiver or expense assumption) to average net assets is less than .85%
and the amount repaid is equal in dollars to the difference between the expenses
included in the determination of such expense ratio and those at an expense
ratio of .85%. Beginning on the first day of the calendar quarter after the net
assets of a Series first reach $100 million, the repayment of expenses shall be
measured by the difference between the expenses included in the determination of
each Series expense ratio and those at an expense ratio of
<PAGE>
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.
As of October 31, 1997, other expenses reimbursed by Lord Abbett and not repaid
by the Georgia Series amount to $40,765. For the fiscal year ended October 31,
1997, Lord Abbett repaid $59,788 in the Georgia Series management fees.
Gross management fees, management fees waived and net management fees for each
Series for the years ended October 31, 1997, 1996 and 1995 respectively, were as
follows:
<TABLE>
<CAPTION>
SERIES 1997
GROSS MANAGEMENT NET
MANAGEMENT FEES MANAGEMENT
FEES WAIVED FEES
<S> <C> <C> <C>
Florida $760,504 -- $760,504
Pennsylvania $464,836 $34,734 $430,102
Michigan $261,943 $45,360 $216,583
Georgia $59,788 $59,788 --
SERIES 1996
GROSS MANAGEMENT NET
MANAGEMENT FEES MANAGEMENT
FEES WAIVED FEES
Florida $835,177 $28,910 $806,267
Pennsylvania $465,181 $62,240 $402,941
Michigan $268,578 $152,438 $116,140
Georgia $40,660 $40,660 --
SERIES 1995
GROSS MANAGEMENT NET
MANAGEMENT FEES MANAGEMENT
FEES WAIVED FEES
Florida $874,245 $248,100 $626,145
Pennsylvania $439,853 $126,160 $313,693
Michigan $249,286 $249,286 --
Georgia $13,900 $13,900 --
</TABLE>
Expenses of the Georgia Series assumed by Lord Abbett for each of the years
ended October 31, 1996 and 1995 were $24,665 and $16,100, respectively.
Lord Abbett has given the Fund the right to use the identifying name "Lord
Abbett" and this right may be withdrawn if Lord Abbett ceases to be the Fund's
investment manager.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281, are
the independent auditors of the Fund and must be approved at least annually by
our trustees to continue in such capacity. They perform audit services for the
Fund including the audit of financial statements included in our annual report
to shareholders.
Bank of New York, 48 Wall Street, New York, New York 10286, serves as the Fund's
custodian.
<PAGE>
4.
Portfolio Transactions
Purchases and sales of portfolio securities usually will be principal
transactions and normally such securities will be purchased directly from the
issuer or from an underwriter or purchased from or sold to a market maker for
the securities. Therefore, the Fund usually will pay no brokerage commissions on
such transaction. Purchases from underwriters of portfolio securities will
include a commission or concession paid by the issuer to the underwriter and
purchases from or sales to dealers serving as market makers will include a
dealer's markup or markdown. Principal transactions, including riskless
principal transactions, are not afforded the protection of the safe harbor in
Section 28 (e) of the Securities Exchange Act of 1934.
Our policy is to obtain best execution on all our portfolio transactions, which
means that we seek to have purchases and sales of portfolio securities executed
at the most favorable prices, considering all costs of the transaction including
dealer markups and markdowns and any brokerage commissions. This policy governs
the selection of brokers or dealers and the market in which the transaction is
executed. To the extent permitted by law, we may, if considered advantageous,
make a purchase from or sale to another Lord Abbett-sponsored fund without the
intervention of any broker-dealer.
Broker-dealers are selected on the basis of their professional capability and
the value and quality of their brokerage and research services. Normally, the
selection is made by traders who are officers of the Fund and also are employees
of Lord Abbett. These traders do the trading as well for other accounts --
investment companies (of which they are also officers) and other investment
clients -- managed by Lord Abbett. They are responsible for negotiation of
prices and any commissions.
We may pay a brokerage commission on the purchase or sale of a security that
could be purchased from or sold to a market maker if our net cost of the
purchase or the net proceeds to us of the sale are at least as favorable as we
could obtain on a direct purchase or sale. Brokers who receive such commissions
may also provide research services at least some of which are useful to Lord
Abbett in their overall responsibilities with respect to us and the other
accounts they manage. Research includes trading equipment and computer software
packages, acquired from third-party suppliers, that enable Lord Abbett to access
various information bases and may include the furnishing of analyses and reports
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
<PAGE>
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, 1997, 1996 and 1995, 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, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
Securities in our portfolio are valued at their market value as of the close of
the NYSE. Market value will be determined as follows: securities listed or
admitted to trading privileges on the New York or American Stock Exchange or on
the NASDAQ National Market System are valued at the last sales price, or, if
there is no sale on that day, at the mean between the last bid and asked prices,
or, in the case of bonds, in the over-the-counter market if, in the judgment of
the Fund's officers, that market more accurately reflects the market value of
the bonds. Over- the-counter securities not traded on the NASDAQ National Market
System market are valued at the mean between the last bid and asked prices.
Securities for which market quotations are not available are valued at fair
market value under procedures approved by the trustees.
Although our shares are continuously offered, we are under no obligation to
maintain the offering or its terms, and the offering may be suspended, changed
or withdrawn. The sales agreements between Lord Abbett and independent
securities dealers provide that all orders are subject to acceptance in New York
and that the right is reserved to reject any order.
The net asset value per share for the Class C shares of the Florida Series will
be determined in the same manner as for the Class A shares (net assets divided
by outstanding shares). The Class C shares of the Florida Series will be sold at
net asset value.
<PAGE>
The maximum offering prices of our Class A shares on October 31, 1997 were
computed as follows:
FLORIDA PENNSYLVANIA
SERIES SERIES SERIES
Net asset value per share (net assets
divided by shares outstanding) .................$4.87 $5.14
Maximum offering price per share (net
asset value divided by .9525) ..................$5.11 $5.40
GEORGIA MICHIGAN
SERIES SERIES
Net asset value per share (net assets $5.31 $5.06
divided by shares outstanding)
Maximum offering price per share (net $5.57 $5.31
asset value divided by .9525)
The offering prices of our Class C shares on October 31, 1997 were computed as
follows:
Florida
Net asset value per share (net assets
divided by shares outstanding) .................$4.87
The Fund has entered into a distribution agreement with Lord Abbett Distributor
under which Lord Abbett Distributor is obligated to use its best efforts to find
purchasers for the shares of the Fund and to make reasonable efforts to sell
Fund shares so long as, in Lord Abbett Distributor's judgment, a substantial
distribution can be obtained by reasonable efforts.
For our last three fiscal years, Lord Abbett as our principal underwriter
received net commissions after allowance of a portion of the sales charge to
independent dealers with respect to Class A shares as follows:
Year Ended Year Ended Year Ended
Oct. 31, 1997 Oct. 31, 1996 Oct. 31, 1995
------------- ------------- -------------
Gross sales charge $870,073 $970,316 $1,438,904
Amount allowed
to dealers $769,150 $848,058 $1,265,847
-------- -------- ----------
Net commissions received
by Lord Abbett $ 100,923 $ 122,258 $ 173,057
======== ========= ==========
CLASS A AND CLASS C RULE 12B-1 PLANS. As described in the Prospectus, each
Series has adopted a Distribution Plan and Agreement pursuant to Rule 12b-1
under the Act for the Class A shares (all Series) and the Class C shares
(Florida Series only): the "A Plans" and the "C Plan," respectively. The A Plans
each become effective when the required level of net assets for each Series is
reached. The Florida Series' A Plan became effective October 1, 1992. The
Pennsylvania Series' A Plan will become effective on April 1, 1998. In adopting
a Plan for each class of 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 its respective
class and each class' shareholders. The expected benefits include greater sales,
lower redemptions of Class shares, which should allow each class to maintain a
consistent cash flow and a higher quality of service to shareholders by dealers
than would otherwise would
<PAGE>
be the case. During the last fiscal year, the Fund paid $355,311 and $77,158
through Lord Abbett to dealers pursuant to the Florida Series' A Plan and C
Plan, respectively. The A Plans for the Georgia and Michigan Series are not yet
effective. Lord Abbett used all amounts received under the Florida Series' A and
C Plans for payments to dealers for (i) providing continuous services to the
Florida 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 Class A and C shares of the Series, respectively.
Each Plan requires the trustees to review, on a quarterly basis, written reports
of all amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. Each Plan shall continue in effect only if its
continuance is specifically approved at least annually by vote of the trustees
and of the trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("outside trustees"), cast in person at a meeting
called for the purpose of voting on the Plan. No Plan may be amended to increase
materially the amount spent for distribution expenses without approval by a
majority of the outstanding voting securities of relevant class of the Series in
question 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 the relevant class of the Series in question.
CONTINGENT DEFERRED SALES CHARGES. A Contingent Deferred Sales Charge ("CDSC")
applies upon early redemption of shares, regardless of class and (i) will be
assessed on the lesser of the net asset value of the shares at the time of
redemption or the original purchase price and (ii) is not imposed on the amount
of your share value represented by the increase in net asset value over the
initial purchase price (including increases due to the reinvestment of dividends
and capital gains distributions).
CLASS A SHARES. As stated in the Prospectus, a CDSC is imposed with respect to
those Class A shares (or Class A shares of another Lord Abbett-sponsored fund or
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.
CLASS C SHARES. (Florida Series only.) As stated in the Prospectus, if Class C
shares of the Florida Series are redeemed for cash before the first anniversary
of their purchase, the redeeming shareholder will be required to pay to the
Florida Series on behalf of Class C shares a CDSC of 1% of the lower of cost or
the then net asset value of Class C shares redeemed. If such shares are
exchanged into the same class of another Lord Abbett-sponsored fund and
subsequently redeemed before the first anniversary of their original purchase,
the charge will be collected by the other fund on behalf of the Florida Series'
Class C shares.
GENERAL. With respect to Class A shares, no CDSC is payable on redemptions by
participants or beneficiaries from employer-sponsored retirement plans under the
Internal Revenue Code for benefit payments due to plan loans, hardship
withdrawals, death, retirement or separation from service and for returns of
excess contributions to retirement plan sponsors. In the case of both Class A
and Class C shares, the CDSC is received by the applicable Series and is
intended to reimburse all or a portion of the amount paid by the Series if the
shares are redeemed before the Series has had an opportunity to realize the
anticipated benefits of having a long-term shareholder account in the Series.
The other funds and series which participate in the Telephone Exchange Privilege
(except (a) Lord Abbett U.S. Government Securities Money Market Fund, Inc.
("GSMMF"), (b) certain series of Lord Abbett Tax-Free Income Fund and the Fund
for which a Rule 12b-1 Plan is not yet in effect, and (c) any authorized
institution's affiliated money market fund satisfying Lord Abbett Distributor as
to certain omnibus account and other criteria, hereinafter referred to as an
"authorized money market fund" or "AMMF" (collectively, the "Non-12b-1 Funds"))
have instituted a CDSC for each class on the same terms and conditions. No CDSC
will be charged on an exchange of shares of the same class between Lord Abbett
funds or between such funds and AMMF. Upon redemption of shares out of the Lord
Abbett family of funds or out of AMMF, the CDSC will be charged on behalf of and
paid to the fund in which the original purchase (subject to a CDSC) occurred.
Thus, if shares of a Lord Abbett fund are exchanged for shares of the same class
of another such fund and the shares of the same class tendered ("Exchanged
Shares") are
<PAGE>
subject to a CDSC, the CDSC will carry over to the shares of the same class
being acquired, including GSMMF and AMMF ("Acquired Shares"). Any CDSC that is
carried over to Acquired Shares is calculated as if the holder of the Acquired
Shares had held those shares from the date on which he or she became the holder
of the Exchanged Shares. Although the Non-12b-1 Funds will not pay a
distribution fee on their own shares, and will, therefore, not impose their own
CDSC, the Non-12b-1 Funds will collect the CDSC on behalf of other Lord Abbett
funds. Acquired Shares held in GSMMF and AMMF which are subject to a CDSC will
be credited with the time such shares are held in GSMMF but will not be credited
with the time such shares are held in AMMF. Therefore, if your Acquired Shares
held in AMMF qualified for no CDSC or a lower CDSC at the time of exchange into
AMMF, that Applicable Percentage will apply to redemptions for cash from AMMF,
regardless of the time you have held Acquired Shares in AMMF.
In no event will the amount of the CDSC exceed 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 CDSC will be
imposed when the investor redeems (i) amounts derived from increases in the
value of the account above the total cost of shares being redeemed due to
increases in net asset value, (ii) shares with respect to which no Lord Abbett
fund or series paid a 12b-1 fee (including shares acquired through reinvestment
of dividend income and capital gains distributions) or (iii) shares which,
together with Exchanged Shares, have been held continuously for 24 months from
the end of the month in which the original sale occurred (in the case of Class A
shares) or for one year or more (in the case of Class C shares). In determining
whether a CDSC is payable, (a) shares not subject to the CDSC will be redeemed
before shares subject to the CDSC and (b) of the shares subject to a CDSC, those
held the longest will be the first to be redeemed.
EXCHANGES. The Prospectus briefly describes the Telephone Exchange Privilege.
You may exchange some or all of your shares of any class for those in the same
class of: (i) Lord Abbett-sponsored funds currently offered to the public with a
sales charge (front-end, back-end or level ), (ii) GSMMF or (iii) AMMF, to the
extent offers and sales may be made in your state. You should read the
prospectus of the other fund before exchanging. In establishing a new account by
exchange, shares of the Fund being exchanged must have a value equal to at least
the minimum initial investment required for the other fund into which the
exchange is made.
Shareholders in other Lord Abbett-sponsored funds and AMMF have the same right
to exchange their shares for the corresponding class of 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 or AMMF (unless a sales charge (front-end,
back-end or level) was paid on the initial investment in a Lord Abbett-sponsored
fund). Exercise of the exchange privilege will be treated as a sale for federal
income tax purposes, and, depending on the circumstances, a gain or loss may be
recognized. In the case of an exchange of shares that have been held for 90 days
or less where no sales charge is payable on the exchange, the original sales
charge incurred with respect to the exchanged shares will be taken into account
in determining gain or loss on the exchange only to the extent such charge
exceeds the sales charge that would have been payable on the acquired shares had
they been acquired for cash rather than by exchange. The portion of the original
sales charge not so taken into account will increase the basis of the acquired
shares.
Shareholders have the exchange privilege unless they refuse it in writing. You
should not view the exchange privilege as a means for taking advantage of
short-term swings in the market, and we reserve the right to terminate or limit
the privilege of any shareholder who makes frequent exchanges. We can revoke or
modify the privilege for all shareholders upon 60 days' prior notice. "Eligible
Funds" are AMMF and other Lord Abbett-sponsored funds which are eligible for the
exchange privilege, except Lord Abbett Series Fund ("LASF") which offers its
shares only in connection with certain variable annuity contracts, Lord Abbett
Equity Fund ("LAEF") which is not issuing shares, and series of Lord Abbett
Research Fund not offered to the general public ("LARF").
STATEMENT OF INTENTION. Under the terms of the Statement of Intention to invest
$100,000 or more over a 13-month period as described in the Prospectus, shares
of a Lord Abbett-sponsored fund (other than shares of LAEF, LASF, LARF and
GSMMF, unless holdings in GSMMF are attributable to shares exchanged from a Lord
Abbett-sponsored fund offered with a front-end, back-end or level sales charge)
currently owned by you are credited as purchases (at their current offering
prices on the date the Statement is signed) toward achieving the stated
investment and reduced
<PAGE>
initial sales charge for Class A shares. Class A shares valued at 5% of the
amount of intended purchases are escrowed and may be redeemed to cover the
additional sales charge payable if the Statement is not completed. The Statement
of Intention is neither a binding obligation on you to buy, nor on the Fund to
sell, the full amount indicated.
RIGHTS OF ACCUMULATION. As stated in the Prospectus, purchasers (as defined in
the Prospectus) may accumulate their investment in Lord Abbett-sponsored funds
(other than LAEF, LARF, LASF, GSMMF, and AMMF unless holdings in GSMMF or AMMF
are attributable to shares exchanged from a Lord Abbett-sponsored fund offered
with a front-end, back-end or level sales charge) so that a current investment,
plus the purchaser's holdings valued at the current maximum offering price,
reach a level eligible for a discounted sales charge for Class A shares.
NET ASSET VALUE PURCHASES OF CLASS A SHARES. As stated in the Prospectus, our
Class A shares may be purchased at net asset value by our 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 trustee's or
employee's spouse (including the surviving spouse of a deceased trustee or
employee). The terms "our trustees" and "employees of Lord Abbett" also include
other family members and retired trustees and employees.
Our Class A shares also may be purchased at net asset value (a) at $1 million or
more, (b) with dividends and distributions from Class A shares of other Lord
Abbett-sponsored funds, except for LARF, LAEF and LASF, (c) under the loan
feature of the Lord Abbett-sponsored prototype 403(b) plan for share purchases
representing the repayment of principal and interest, (d) by certain authorized
brokers, dealers, registered investment advisers or other financial institutions
who have entered into an agreement with Lord Abbett Distributor in accordance
with certain standards approved by Lord Abbett Distributor, providing
specifically for the use of our shares in particular investment products made
available for a fee to clients of such brokers, dealers, registered investment
advisers and other financial institutions, ("mutual fund wrap fee program"), (e)
by employees, partners and owners of unaffiliated consultants and advisors to
Lord Abbett, Lord Abbett Distributor or Lord Abbett-sponsored funds who consent
to such purchase if such persons provide service to Lord Abbett, Lord Abbett
Distributor or such funds on a continuing basis and are familiar with such
funds, and (f) through Retirement Plans with at least 100 eligible employees.
Shares are offered at net asset value to these investors for the purpose of
promoting goodwill with employees and others with whom Lord Abbett Distributor
and/or the Fund has business relationships.
Our shares may be issued at net asset value in exchange for the assets, subject
to possible tax adjustment, of a personal holding company or an investment
company. There are economies of selling efforts and sales-related expenses with
respect to offers to these investors and those referred to above.
REDEMPTIONS. A redemption order is in proper form when it contains all of the
information and documentation required by the order form or supplementally by
Lord Abbett Distributor or the Fund to carry out the order. The signature(s) and
any legal capacity of the signer(s) must be guaranteed by an eligible guarantor.
See the Prospectus for expedited redemption procedures.
The right to redeem and receive payment, as described in the Prospectus, may be
suspended if the NYSE is closed (except for weekends or customary holidays),
trading on the NYSE is restricted or the Securities and Exchange Commission
deems an emergency to exist.
Our Board of 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.
<PAGE>
DIV-MOVE. Under the Div-Move service described in the Prospectus, you can invest
the dividends paid on your account into an existing account in any other
Eligible Fund. The account must be either your account, a joint account for you
and your spouse, a single account for your spouse, or a custodial account for
your minor child under the age of 21. You should read the prospectus of the
other fund before investing.
INVEST-A-MATIC. The Invest-A-Matic method of investing in the Fund and/or any
other Eligible Fund is described in the Prospectus. To avail yourself of this
method you must complete the application form, selecting the time and amount of
your bank checking account withdrawals and the funds for investment, include a
voided, unsigned check and complete the bank authorization.
SYSTEMATIC WITHDRAWAL PLANS. The Systematic Withdrawal Plan (the "SWP") also is
described in the Prospectus. You may establish a SWP if you own or purchase
uncertificated shares having a current offering price value of at least $10,000.
Lord Abbett prototype retirement plans have no such minimum. With respect to
Class C shares, the CDSC will be waived on and after the first anniversary of
their purchase. The SWP involves the planned redemption of shares on a periodic
basis by receiving either fixed or variable amounts at periodic intervals. Since
the value of shares redeemed may be more or less than their cost, gain or loss
may be recognized for income tax purposes on each periodic payment. Normally,
you may not make regular investments at the same time you are receiving
systematic withdrawal payments because it is not in your interest to pay a sales
charge on new investments when in effect a portion of that new investment is
soon withdrawn. The minimum investment accepted while a withdrawal plan is in
effect is $1,000. The SWP may be terminated by you or by us at any time by
written notice.
RETIREMENT PLANS. The Prospectus indicates the types of retirement plans for
which Lord Abbett provides forms and explanations. Lord Abbett makes available
the retirement plan forms and custodial agreements for IRAs (Individual
Retirement Accounts including Roth and Simple IRAs and 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.
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 and
Pennsylvania, each Series may be required to refrain from engaging in
transactions, techniques or practices it is otherwise permitted to engage in or
to dispose of investments attributable to such transactions each year before the
relevant "statutory assessment dates."
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.
<PAGE>
The value of any shares redeemed by the Fund or repurchased or otherwise sold
may be more or less than your tax basis at the time the redemption, repurchase
or sale is made. Any gain or loss generally will be taxable for federal income
tax purposes. Any loss realized on the sale, redemption or repurchase of Fund
shares held for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distribution designated by the Fund
as a "capital gains distribution" received with respect to such shares.
Moreover, shareholders will not be allowed to recognize for tax purposes any
capital loss realized on the redemption or repurchase of Fund shares which they
have held for six months or less to the extent of any tax-exempt distributions
received on the shares. Losses on the sale of stock or securities are not
deductible if, within a period beginning 30 days before the date of the sale and
ending 30 days after the date of the sale, the taxpayer acquires stock or
securities that are substantially identical.
Each 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.
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 1997, 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 service 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 than some types of service jobs, service
employment has 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. Although Florida's dependence on the construction and
construction-related manufacturing sectors has declined in recent years, these
highly cyclical sectors still remain an important part of Florida's economic
outlook. The tourism industry also remains one of Florida's most important
industries. Although the growing sophistication of the Florida
<PAGE>
tourism industry has, to a degree, resulted in a reduction in its seasonality,
the tourism industry still has a considerable seasonal component.
For fiscal year 1996-97, the estimated General Revenue plus Working Capital and
Budget Stabilization funds available total $16,617.4 million, a 6.7% increase
over 1995-96. The $15,568.7 million in Estimated Revenues represent a 6.3%
increase over the analogous figure in 1995-96. With combined General Revenue,
Working Capital Fund, and Budget Stabilization Fund appropriations at $15,537.2
million, unencumbered reserves at the end of 1996- 97 are estimated at $1,080.0
million.
As of July 1997, estimated fiscal year 1997-98 General Revenue plus Working
Capital and Budget Stabilization funds available total $17,553.9 million, a 5.6%
increase over 1996-97. The $16,321.6 million Estimated Revenues represent an
increase of 4.8% over the previous year's Estimated Revenues. With combined
General Revenue, Working Capital Fund and Budget Stabilization Fund
appropriations at $16,716.5 million, unencumbered reserves at the end of the
fiscal year 1997-98 are estimated at $837.4 million.
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, the Working Capital Fund, and the Budget
Stabilization Fund. The General Revenue Fund receives the majority of State tax
revenues. The greatest single source of tax receipts in Florida is the sales and
use tax, a more volatile and unreliable revenue source than a personal income
tax, which is not used in Florida. 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 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
In the summer of 1997, preliminary figures on the largest sources of employment
by industry group within the State for 1996 were, in descending order: services,
wholesale and retail trade; manufacturing; government; transportation and other
public utilities; finance, insurance and real estate; contract construction and
mining. The unemployment rate of the civilian labor force in the State as of May
1997 was 4.4%. Per capita income during 1996 was $22,709 in Georgia (as compared
with $24,231 in the United States).
As of August 28, 1997, State Treasury receipts for the year ending June 30, 1996
were estimated to be $11.324 billion, representing a 1.41% increase over
receipts collected during the prior year. The State's personal income tax, which
has a graduated scale of 1% to 6% and the corporate income tax which has a rate
of 6%, accounted for 44% of the State's total revenue collections in 1996. The
State's general sales and use tax accounted for 34% 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.
<PAGE>
As of August 28, 1997, the outstanding principal amount of indebtedness of the
State was $5.071 billion, and the total debt per capita was equal to $689.64,
representing 3.31% of personal income. Although economic growth in Georgia has
slowed since the end of the 1996 Olympics, there has not been a significant drop
off from pre-Olympic growth rates.
MICHIGAN BONDS
Michigan's economy remains heavily concentrated in the manufacturing sector, and
the State's automobile industry remains an important component of this sector.
Because of this link to the manufacturing sector, the State's economy is
potentially more volatile than those of other states with more diverse
economies. At $24,945, the State's per capita income stood slightly higher than
the national level of $24,426 in 1996. Renewed state economic growth has caused
the Michigan unemployment rate to remain in step or slightly below the U.S.
unemployment rate in recent years, running counter to a 27-year trend of
Michigan having a higher unemployment rate than the national average.
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 fund balance for the General Fund at the close of fiscal year
1995-96 was distributed, by statute, as follows: the first $10 million was
distributed for arts and cultural facility capital outlay grants; the next $10
million was used to fund state agency special maintenance costs; the third $10
million was used for aeronautics projects; and a remaining amount of $91.3
million was transferred to the State's Budget Stabilization Fund. With respect
to other funds, the State Constitution requires that any prior year's surplus or
deficit in any fund be included in the Succeeding year's budget for that fund.
During the fiscal year ended September 30, 1997 the State's level of general
obligation debt decreased to $655.2 million, and total special obligation debt
increased by $157.3 million to $2,490.4 million. Other state-related revenue
debt increased $70.5 million to $2,274.4 million during the 1996-97 fiscal year.
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 revenues, non-tax revenues, and 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.
<PAGE>
Fiscal 1997 public health and human services expenditures were $13.4 billion.
For fiscal 1998, $13.8 billion has been appropriated for these purposes, and
increase of 3.5 percent. Of the fiscal 1998 expenditures, $5.7 billion will be
from the General Fund. These programs are the largest single component of
combined state and federal spending in the Commonwealth's operating budget.
The fiscal years 1992 through 1996 were years of recovery from the recession in
1990 and 1991. The recovery fiscal years were characterized by modest economic
growth and low inflation rates. These economic conditions, combined with several
years of tax reductions following the various tax rate increases and tax base
expansions enacted in fiscal 1991 for the General Fund, produced modest
increases in tax revenues during the period. Tax revenues from fiscal 1992
through 1996 rose at an annual average rate of 2.8 percent. Total revenues and
other income sources increased during this period by an average annual rate of
3.3 percent. Intergovernmental revenue was the income category with the largest
rate of increase during the period. Over the five-year period, receipts from
this source rose 58.5 percent. One-third of that increase occurred during fiscal
1996. This large one-year increase was due mainly to an accounting change in the
General Fund in which food stamp coupon revenue received from the federal
government is now counted as income to the Commonwealth. Expenditures and other
uses during the fiscal 1992 through fiscal 1996 period rose at a 4.4 percent
annual rate, led by an annual average increases of 14.2 percent for protection
of persons and property program costs and 11.4 percent for capital outlay costs.
Expenditure reductions for fiscal 1996 from the previous fiscal year for
operating transfers out and for conservation of natural resources program costs
were the result of accounting changes affecting the General Fund and the Motor
License Fund and a re-categorization of expenditures due to a departmental
restructuring in the General Fund. At the close of fiscal 1996, the fund balance
for the governmental fund types totaled $1,986.3 million, an increase of $58.7
million over fiscal 1995 and $758.5 million over fiscal 1992.
The unappropriated balance of commonwealth revenues increased during the 1997
fiscal year by $432.9 million. Higher than estimated revenues and slightly lower
expenditures than budgeted caused the increase. The unappropriated balance rose
from an adjusted amount of $158.5 million at the beginning of fiscal 1997, to
$591.4 million (prior to reserves for transfer to the Tax Stabilization Reserve
Fund) at the close of the fiscal year.
Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 (3.4 percent) above the estimate made at the time the
budget was enacted. Revenue from taxes was the largest contributor to higher
than estimated receipts. Tax revenue in fiscal 1997 grew 6.1 percent over tax
revenues in fiscal 1996. This rate of increase was not adjusted for legislated
reductions that affected receipts during both of those fiscal years and therefor
understates the actual underlying rate of growth of tax revenue during fiscal
1997.
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 $4,795.1 million on June 30, 1997 a
decrease of $261.0 million from June 30, 1996. In its current debt financing
plan, Commonwealth infrastructure investment projects include improvement and
rehabilitation of existing capital facilities, such as water supply systems, and
construction of new facilities, such as prisons, transit facilities and public
buildings. The debt financing plan also includes a disaster relief program
enacted by the General Assembly in June of 1996. No debt issuance for highway
capital projects is currently planned.
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. Tax anticipation notes 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.
<PAGE>
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.
COMMONWEALTH-RELATED OBLIGATIONS. Certain Commonwealth-created agencies have
statutory authorization to incur debt for which Commonwealth appropriations to
pay debt service thereon are not required. The debt of these agencies is
supported by assets of or revenues derived from the various projects financed;
it is not a moral or statutory authority 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, 1997 include the Delaware River Joint Toll Bridge Commission ($53.9
million), the Delaware River Port Authority ($512.0 million), the Pennsylvania
Economic Development Financing Authority ($1,070.8 million), the Pennsylvania
Energy Development Authority ($118 million), the Pennsylvania Higher Education
Assistance Agency ($1,536.7 million), the Pennsylvania Higher Education
Facilities Authority ($2,773.7 million), the State Public School Building
Authority ($316.0 million), the Pennsylvania Turnpike Commission ($1,198.5
million), the Pennsylvania Industrial Development Authority ($409.5 million),
the Pennsylvania Infrastructure Investment Authority ($205.9 million; and the
Philadelphia Regional Port Authority ($61.1 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, a municipal authority organized
by the City of Philadelphia to, among other things, acquire and prepare various
sites for use as intermediate care facilities for the mentally retarded.
The Commonwealth, through several of its departments and agencies, has entered
into various agreements to lease as lessee 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.
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 May 20, 1997. As
of October 1997, PICA had issued $1,761.7 million 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, 1996 showed a
surplus of approximately $118.5 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 pharmaceutical, scientific instruments, computers, and microprocessors,
medical product and electrical product industries. The service sector, including
wholesale and retail trade, finance, insurance and real estate, also plays a
major role in the economy. The service sector ranks second only to manufacturing
in contribution to the gross domestic product and leads all sectors in providing
employment. In recent years, the service sector has experienced significant
growth in response to and paralleling the expansion of the manufacturing sector.
Growth in construction and tourism also contributed to increased economic
activity in fiscal 1996.
Much of the development of the manufacturing sector in Puerto Rico to date can
be attributed to various federal and Commonwealth tax incentives, most notably
Section 936 of the Internal Revenue Code (the "Code") which allows companies
with operations in Puerto Rico and other U.S. territories to receive a credit to
be used against U.S. tax
<PAGE>
on certain income from operations and the Commonwealth's Industrial Incentives
Program. However, effective for years beginning after December 31, 1995, Section
936 has been repealed subject to certain special and transitional rules. The
expected impact of the repeal of this provision on Puerto Rico's economy is not
yet known.
Puerto Rico's more than decade-long economic expansion continued throughout the
five-year period from fiscal 1991 through fiscal 1996, and affected almost every
sector of its economy and resulted in record levels of employment (although
Puerto Rico's unemployment rate has continued to exceed the average for the
United States). Factors behind this expansion included Commonwealth-sponsored
economic development programs, , periodic declines in the exchange value of the
United States dollar, increases in the level of federal transfers and the
relatively low cost of borrowing.
The Constitution of Puerto Rico provides that public debt of the Commonwealth
will constitute a first claim on available Commonwealth revenues. Public debt
includes general obligation bonds and notes of the Commonwealth and any payments
required to be made by the Commonwealth under its guarantees of bonds and notes
issued by its public instrumentalities.
The Constitution of Puerto Rico also provides that direct obligations of the
Commonwealth evidenced by full faith and credit bonds or notes shall not be
issued if the amount of the principal of and interest on such bonds and notes
and on all such bonds and notes theretofore issued which is payable in any
fiscal year, together with any amount paid by the Commonwealth in the preceding
fiscal year on account of bonds or notes guaranteed by the Commonwealth, exceeds
15% of the average annual revenues raised under the provisions of Commonwealth
legislation and covered into the Treasury of Puerto Rico (principally income
taxes, property taxes and excise taxes) in the two fiscal years preceding the
then current fiscal year.
With the approval of the North American Free Trade Agreement by the United
States Congress which is intended to eliminate certain restrictions on trade
between Canada, the United States and Mexico, certain of Puerto Rico's
industries, including those that are lower salaried and labor intensive, may
face increased competition from Mexico. However, Puerto Rico's favorable
investment environment, skilled work force, infrastructure development would
tend to create expanded trade opportunities for Puerto Rico in such areas as
pharmaceutical and high technology manufacturing. This may, however be adversely
affected by the repeal of Section 936 of the code as outlined above.
8.
Past Performance
Each Series computes the average annual compounded rate of total return for each
class during specified periods that would equate the initial amount invested to
the ending redeemable value of such investment by adding one to 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 (as described in the next paragraph) from the
initial amount invested and reinvestment of all income dividends and capital
gains distributions on the reinvestment dates at prices calculated as stated in
the Prospectus. The ending redeemable value is determined by assuming a complete
redemption at the end of the period(s) covered by the average annual total
return computation.
In calculating total returns for Class A shares, the current maximum sales
charge of 4.75% (as a percentage of the offering price) is deducted from the
initial investment (unless the return is shown at net asset value). For Class C
shares, the 1.0% CDSC is applied to the Florida Series' investment result for
that class for the time period shown prior to the first anniversary of purchase
(unless the total return is shown at net asset value). Total returns also assume
that all dividends and capital gains distributions during the period are
reinvested at net asset value per share, and that the investment is redeemed at
the end of the period.
The total returns for the one-year ended October 31, 1997 for Class A shares of
the Florida, Georgia, Michigan and Pennsylvania Series were: 2.00%, 4.00%, 3.00%
and 3.20%, respectively. The average annual compounded rates of total return for
the five year period ended October 31, 1997 for the Florida Series and the life
of the Florida Series
<PAGE>
(commencing on September 25, 1991 to October 31, 1997), the life of the Georgia
Series (commencing on December 27, 1994 to October 31, 1997), the life of the
Pennsylvania Series (commencing on February 3, 1992 to October 31, 1997) and the
life of the Michigan Series (commencing on December 1, 1992 to October 31,
1997), were as follows:
5.69%, 5.86%, 8.31%, 6.57% and 6.28%, respectively.
The total return for the Class C shares of the Florida Series for the one year
ended October 31, 1997 and the life of the class (commencing July 15, 1996 to
October 31, 1997) was 6.40% and 7.56%, respectively.
Our yield quotation for each class is based on a 30-day period ended on a
specified date, computed by dividing the net investment income per share earned
during the period by the maximum offering price per share of such class on the
last day of the period. This is determined by finding the following quotient:
take the dividends and interest earned during the period for a class minus its
expenses accrued for the period and divide by the product of (i) the average
daily number of Class shares outstanding during the period that were entitled to
receive dividends and (ii) the maximum offering price per share of such class on
the last day of the period. To this quotient add one. This sum is multiplied by
itself five times. Then one is subtracted from the product of this
multiplication and the remainder is multiplied by two. Yield for the Class A
shares reflects the deduction of the maximum initial sales charge, but may also
be shown based on the Class A net asset value per share. Yield for C shares does
not reflect the deduction of the CDSC. For the 30-day period ended October 31,
1997 the yields for Class A shares of the Florida, Georgia, Pennsylvania and
Michigan Series were 4.24%, 4.63%, 4.65% and 4.48%, respectively. The yield for
Class C shares of the Florida Series for such 30 day period was 3.73%.
Each Series' tax-equivalent yield for each Class is computed by dividing that
portion of the appropriate Class' yield (as determined above) which is tax
exempt by one minus a stated income tax rate (Florida - .3600%; Pennsylvania
- -.3779%, Michigan - .3882% and Georgia - .3984%) and adding the product to that
portion, if any, of the appropriate Class' yield that is not tax exempt. For the
30-day period ended on October 31, 1997, the tax-equivalent yields for Class A
shares of the Florida, Georgia, Pennsylvania and Michigan Series were 6.63%,
7.70%, 7.47%, and 7.32%, respectively. The tax-equivalent yield for Class C
shares of the Florida Series for such 30 day period was 5.83%.
It is important to remember that these figures represent past performance and an
investor should be aware that the investment return and principal value of a
Series investment will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Therefore, there is no
assurance that this performance will be repeated in the future.
9.
Further Information About The Fund
The Fund 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 Fund does
not hold regular meetings of shareholders, although special meetings may be
called for a specific Series or for the Fund as a whole, for purposes such as
electing or removing trustees, changing fundamental policies or approving an
advisory contract. The Fund 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 Fund's outstanding shares, 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 Fund shares, 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 Fund's mailing their request.
Under the Declaration of Trust, the trustees may provide for additional series
and classes from time to time. Any additional series and classes would have
rights separate from the other series and classes. Within each series and class,
all shares have equal voting rights and equal rights with respect to dividends,
assets and liquidation.
<PAGE>
Under Massachusetts law, shareholders could, under certain circumstances, be
held liable for the obligations of the Fund. However, the Declaration of Trust
disclaims shareholder liability for acts, obligations or affairs of the Fund and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund 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 Fund believes that, in view of the above, the risk of personal
shareholder liability is remote.
The directors, trustees and officers of Lord Abbett-sponsored mutual funds,
together with the partners and employees of Lord Abbett, are permitted to
purchase and sell securities for their personal investment accounts. In engaging
in personal securities transactions, however, such persons are subject to
requirements and restrictions contained in the Fund's Code of Ethics which
complies, in substance, with each of the recommendations of the Investment
Company Institute's Advisory Group on Personal Investing. Among other things,
the Code requires that Lord Abbett partners and employees obtain advance
approval before buying or selling securities, submit confirmations and quarterly
transaction reports, and obtain approval before becoming a director of any
company; and it prohibits such persons from investing in a security 7 days
before or after any Lord Abbett-sponsored fund trades in such security,
profiting from trades of the same security within 60 days and trading on
material non-public information. The Code imposes certain similar requirements
and restrictions on the independent directors and trustees of each of the Lord
Abbett-sponsored mutual funds to the extent contemplated by the recommendations
of such Advisory Group.
10.
Financial Statements
The financial statements for the fiscal year ended October 31, 1997 and the
report of Deloitte & Touche LLP, independent auditors, on such financial
statements in the 1997 Annual Report to Shareholders of Lord Abbett Tax- Free
Income Trust, are incorporated herein by reference to such financial statements
and report in reliance upon the authority of Deloitte & Touche LLP as experts in
auditing and accounting.
<PAGE>
