LORD ABBETT
Statement of Additional Information February 1, 2000
Lord Abbett Tax-Free Income Trust
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This Statement of Additional Information is not a Prospectus. A Prospectus may
be obtained from your securities dealer or from Lord Abbett Distributor LLC
("Lord Abbett Distributor"), 80 Hudson Street, Jersey City, New Jersey
07302-3973. This Statement of Additional Information relates to, and should be
read in conjunction with, the Prospectus dated February 1, 2000.
Shareholder inquiries should be made by directly contacting the Fund or by
calling 800-821-5129. The Annual Report to Shareholders is available, without
charge, upon request by calling that number. 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 13
4. Portfolio Transactions 14
5. Purchases, Redemptions and Shareholder Services 15
6. Taxes 22
7. Risk Factors 23
8. Performance 27
9. Information About the Fund 28
10. Financial Statements 29
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1.
Investment Policies
Each Fund of Lord Abbett Tax-Free Income Trust (the "Company" or the "Fund") is
a non-diversified open-end managment investment company registered under the
Investment Company Act of 1940, as amended (the "Act").
Fundamental Investment Restrictions. Each Fund is subject to the
following fundamental investment restrictions which cannot be changed
without the approval of the holders of a majority of its outstanding shares.
Each Fund may not:
(1) borrow money (except that (i) each Fund 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) each Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) each
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) each
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 Funds' 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 Fund 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 Fund 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 each Company 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 policies
in the Prospectus and the investment
restrictions above, which cannot be changed without shareholder approval,each
Fund is also subject to the following non-fundamental investment policies which
may be changed by the Board of Trustees without shareholder approval.
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Each Fund 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;
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(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 Fund's 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 Fund's
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 Fund's total assets (included within such limitation, but not to
exceed 2% of such Fund's 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 Fund 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 Fund of the Company.
With respect to each Fund, there is no fundamental policy or restriction with
respect to diversification, but each Fund will be required to meet the
diversification rules under Subchapter M of the Internal Revenue Code.
While each of the Funds may take short-term gains if deemed appropriate,
normally, the Funds 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, 1999 the portfolio turnover rates for the Florida, Georgia, Michigan and
Pennsylvania Funds were 191.12%, 115.87%, 186.97% and 40.76%, respectively.
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).
Municipal Bonds
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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.
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
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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 ts 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.
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 Fund may engage in futures and options transactions in accordance
with its investment objective and policies. Each Fund intends to engage in such
transactions if it appears advantageous 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 Fund 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 Fund 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
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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 Fund 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 Fund and futures contracts subject
to outstanding options written by each Fund would exceed 50% of the total assets
of each Fund. 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 Fund will incur brokerage fees when it purchases or sells contracts and
will be required to maintain margin deposits. At the time each Fund 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 Fund's return. Futures contracts entail risks. If
Lord Abbett's judgment about the general direction of interest rates or markets
is wrong, the Funds' 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 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 Fund could lose money on the
financial futures contracts and also on the value of its portfolio securities.
Options On Financial Futures Contracts. Each Fund 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 Fund 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 Fund may expire worthless, in which case that Fund would lose the
premium paid therefor.
Options On Securities. Each Fund 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 Fund 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
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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 Fund 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 Fund to protect capital gains in an appreciated security it owns, without
being required to actually sell that security. At times a Fund might like to
establish a position in securities upon which call options are available. By
purchasing a call option, a Fund 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 Fund is only at risk for the amount of the premium paid for
the call option which it can, if it chooses, permit to expire.
During the option period, the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, it realizes a gain or loss
from the sale of the underlying security, with the proceeds being increased by
the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain and the
buyer a loss in the amount of the premium. If the secured put writer has to buy
the underlying security because of the exercise of the put option, the secured
put writer incurs an unrealized loss to the extent that the current market value
of the underlying security is less than the exercise price of the put option,
minus the premium received.
Over-The-Counter Options. As indicated in the Prospectus, each Fund 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 each Fund may experience material losses. However, in
writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities and a wider range of expiration
dates and exercise prices, than are exchange- traded options. Since there is no
exchange, normally pricing is done by reference to information from market
makers, which information is carefully monitored by the Company's 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 Fund 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 Fund 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 Fund 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 Company 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
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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 Company 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 Funds'
portfolio. A description of such procedures is set forth below.
Each Fund will only engage in OTC options transactions with dealers that have
been specifically approved by the trustees of the Company. The Fund and their
investment adviser believe that such dealers present minimal credit risks to the
Fund and, therefore, should be able to enter into closing transactions, if
necessary. The Fund will not engage in OTC options transactions if the amount
invested by a Fund in OTC options, plus a "liquidity charge" related to OTC
options written by such Fund, plus the amount invested by such Fund in illiquid
securities, would exceed 10% of the Fund' net assets. The "liquidity charge"
referred to above is computed as described below.
The Company anticipates entering into agreements with dealers to which the Funds
sell OTC options. Under these agreements, a Fund 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 Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
Options On Securities Indices. Each Fund 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 Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, a Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike security options, all settlements are in cash
and gain or loss depends upon price movements in the market generally (or in a
particular industry or segment of the market), rather than upon price movements
in individual securities. Price movements in securities which a Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Fund 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 Fund 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 Fund writes a call
option on a securities index at a time when the contract value exceeds the
exercise price, the Fund 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 Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.
Delayed Delivery Transactions. Each Fund 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 Fund 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 Fund at
the time of entering into the transaction. When a Fund 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
Fund makes the commitment to purchase a security on
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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 Fund 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 Fund, 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 Fund 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 Fund 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 Fund 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 Fund will maintain in a segregated account cash or liquid 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 Fund will
enter into a futures contract or purchase an option thereon if immediately
thereafter the initial margin deposits for futures contracts held by the Fund
plus premiums paid by it for open options on futures would exceed 5% of that
Funds' total assets. No Fund 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 Fund holds or intends to purchase. When futures contracts or options thereon
are purchased to protect against a price increase on securities intended to be
purchased later, it is anticipated that at least 75% of such intended purchases
will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts will at all times not exceed
the sum of: (1) accrued profit on such contracts held by the broker; (2) cash or
high-quality money market instruments set aside in an identifiable manner and
(3) cash proceeds from investments due in 30 days.
2.
Trustees and Officers
The Board of Trustees of the Fund is responsible for the management of the
business and affairs of each Fund.
The following trustee is a partner of Lord, Abbett & Co. ("Lord Abbett"), 90
Hudson Street, Jersey City, New Jersey 07302-3973. He has been associated with
Lord Abbett for over five years and is also an officer, director or trustee of
the thirteen other Lord Abbett-sponsored funds.
*Robert S. Dow, age 54, Chairman and President
*Mr. Dow is an "interested person" as defined in the Act.
The following outside trustees are also directors or trustees of thirteen other
Lord Abbett-sponsored funds referred to above.
E. Thayer Bigelow, Trustee
245 Park Avenue, Suite 2414
New York, New York
Senior Adviser, Time Warner, Inc. (since 1998). Formerly, Acting Chief Executive
Officer of Courtroom Television Network (1997-1998). Formerly, President and
Chief Executive Officer of Time Warner Cable Programming, Inc. (1991-1997).
Prior to that, President and Chief Operating Officer of Home Box Office, Inc.
Age 58.
9
<PAGE>
William H.T. Bush, Trustee
Bush-O'Donnell & Co., Inc.
101 South Hanley Road, Suite 1025
St. Louis, Missouri
Co-founder and Chairman of the Board of the financial advisory firm of
Bush-O'Donnell & Company (since 1986). Age 61.
Robert B. Calhoun, Jr., Trustee
Monitor Clipper Partners
650 Madison Avenue, 9th Floor
New York, New York
Managing Director of Monitor Clipper Partners (since 1997) and President of The
Clipper Group L.P., both private equity investment funds (since 1990). Age 57.
Stewart S. Dixon, Trustee
Wildman, Harrold, Allen & Dixon
225 W. Wacker Drive (Suite 2800)
Chicago, Illinois
Partner in the law firm of Wildman, Harrold, Allen & Dixon (Since 1990). Age 69.
John C. Jansing, Trustee
162 S. Beach Road
Hobe Sound, Florida
Retired. Former Chairman of Independent Election Corporation of America, a proxy
tabulating firm. Age 74.
C. Alan MacDonald, Trustee
Directorship, Inc.
8 Sound Shore Drive
Greenwich, Connecticut
Currently involved in golf development management on a consultancy basis (since
1999). Formerly, Managing Director of The Directorship Inc., a consultancy in
board management and corporate governance (1997-1999). Prior to that, General
Partner of The Marketing Partnership, Inc., a full service marketing consulting
firm (1994 - 1997). Prior to that, 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 eighteen 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
66.
10
<PAGE>
Hansel B. Millican, Jr., Trustee
Rochester Button Company
1328 Broadway (Suite 816)
New York, New York
President and Chief Executive Officer of Rochester Button Company (since 1991).
Age 71.
Thomas J. Neff, Trustee
Spencer Stuart
277 Park Avenue
New York, New York
Chairman of Spencer Stuart, an executive search consulting firm (since 1976).
Currently serves as Director of Ace, Ltd. (NYSE). Age 62.
The second column of the following table sets forth the compensation accrued for
outside trustees. The third column sets forth information with respect to the
pension or retirement benefits accrued for outside directors/trustees maintained
by the Lord Abbett-sponsored Funds. No trustee of the Funds associated with Lord
Abbett and no officer of the funds received any compensation from the funds for
acting as a trustee or officer.
For the Fiscal Year Ended October 31, 1999
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Pension or For Year Ended
Retirement Benefits December 31, 1999
Accrued by the Total Compensation
Aggregate Company and Paid by the Company and
Compensation Thirteen Other Lord Thirteen Other Lord
Accrued by Abbett-sponsored Abbett-sponsored
Name of Trustee the Company/1 Funds/2 Funds/3
- --------------- -------------- -------------------- ---------------------
<S> <C> <C> <C>
E. Thayer Bigelow $1,000 $17,068 $57,400
William H. T. Bush* $ 289 $none $27,500
Robert B. Calhoun, Jr.** $ 394 $none $33,500
Stewart S. Dixon $ 984 $32,190 $56,500
John C. Jansing $ 971 $45,0854 $55,500
C. Alan MacDonald $ 971 $30,703 $55,000
Hansel B. Millican, Jr. $ 971 $37,747 $55,500
Thomas J. Neff $ 989 $19,853 $56,500
</TABLE>
*Elected as of August 13, 1998. **Elected as of June 17, 1998.
1. Outside trustees/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 ("equity
based 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, 1999 with respect to the equity based plan
established for independent directors/trustees in 1996. This plan
supersedes a previously approved retirement plan for all future
directors/trustees. 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.
11
<PAGE>
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, by the Lord Abbett-sponsored funds during the
year ended December 31, 1999 (including fees directors have chosen to
defer) but does not include amounts accrued under the equity based plan and
shown in Column 3 The amounts of the aggregate compensation payable by the
Fund as of October 31, 1999 deemed invested in Fund shares, including
dividends reinvested and changes in net asset value applicable to such
deemed investments, were: Mr. Bigelow, $5,695; Mr. Dixon, $1,216; Mr.
Jansing, $8,010; Mr. MacDonald, $2,575; Mr. Millican, $8,041, and Mr. Neff,
$8,034. If the amounts deemed invested in Company shares were added to each
trustees actual holdings of Company shares as of October 31, 1999, each
would own the following: Mr. Bigelow, $5,695; Mr. Dixon, $1,216, Mr.
Jansing, $8,010, Mr. MacDonald, $2,575, Mr. Millican, $8,041, and Mr. Neff,
$8,034.
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.
Except where indicated, the following executive officers of the Fund have
been associated with Lord Abbett for over five years. Messrs. Brown, Carper,
Messrs. Hilstad, and Morris are partners of Lord Abbett; the others are
employees. None have received compensation from the Funds.
Executive Vice President:
Zane Brown, age 48
Vice Presidents:
Paul A. Hilstad, age 57, Vice President and Secretary (with Lord Abbett since
1995; formerly Senior Vice President and General Counsel of American Capital
Management & Research, Inc.)
Joan A. Binstock, age 45 (with Lord Abbett since 1999, formerly Chief Operating
Officer of Morgan Grenfell from 1996 to 1999, prior thereto Principal of Ernst &
Young LLP)
Daniel E. Carper, age 48
Philip Fang, age 34
Lawrence H. Kaplan, age 43 (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.)
John R. Mouseeau, age 43
A.Edward Oberhaus, III, age 40
Tracie E. Richter, age 31 (with Lord Abbett since 1999, formerly Vice
President-Head of Fund Administration of Morgan Grenfell from 1998 to 1999, Vice
President of Bankers Trust from 1996 to 1998, prior thereto Tax Associate of
Goldman Sachs)
Treasurer
Donna M. McManus, age 39 (with Lord Abbett since 1996, formerly a Senior Manager
at Deloitte & Touche LLP)
</R?
The Company does not hold annual meetings of shareholders unless one or more
matters are required to be acted on by shareholders under the Act. Under the
Company's Declaration of Trust, shareholder meetings may be called at any
12
<PAGE>
time by certain officers of the Company or by a majority of the trustees (i) for
the purpose of taking action upon any matter requiring the vote or authority of
the Company'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 Company outstanding and entitled to vote at the
meeting.
As of February 1,2000, our officers and directors/trustees as a group owned less
than 1% of the Fund's outstanding shares and there were no known record holders
of 5% or more of the Fund's outstanding shares other than Lord Abbett
Distributor.
3.
Investment Advisory and Other Services
The services performed by Lord Abbett are described under "Management" in the
Prospectus. Under the Management Agreement, each fund is obligated to pay Lord
Abbett a monthly fee, based on average daily net assets of each Fund for each
month, at the annual rate of .50 of 1%. This fee is allocated among each Fund's
classes based on the class's proportionate share of the average daily net assets
of the Fund.
Each Fund pays 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 Fund. Subsequently, Lord
Abbett may charge these fees and/or omit these subsidies on a partial or
complete basis.
The Company's Management Agreement provides for each Fund 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 Fund first reaches $50 million (the
"commencement date") and until the net assets reach $100 million, provided the
ratio of operating expenses of the Fund (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 Fund first reach $100 million, the repayment of expenses shall be
measured by the difference between the expenses included in the determination of
each Fund expense ratio and those at an expense ratio of 1.05%. A Fund 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, 1999, other expenses reimbursed by Lord Abbett and not repaid
by the Georgia Fund amounted to $.
Gross management fees, management fees waived and net management fees for each
Fund for the years ended October 31, 1999, 1998 and 1997 respectively, were as
follows:
FUND 1999
- ---- ----
Gross Management Net
Management Fees Management
Fees Waived Fees
---- ------ ----
Florida $641,726 - $641,726
Pennsylvania $504,847 - $504,847
Michigan $265,750 - $265,750
Georgia $129,345 $(129,345) -
13
<PAGE>
FUND 1998
- ---- ----
Gross Management Net
Management Fees Management
Fees Waived Fees
---- ------ ----
Florida $702,730 - $702,730
Pennsylvania $492,670 - $492,670
Michigan $266,479 - $266,479
Georgia $84,279 $84,279 -
FUND 1997
- ---- ----
Gross Management Net
Management Fees Management
Fees Waived Fees
---- ------ ----
Florida $760,504 -- $760,504
Pennsylvania $464,836 $34,734 $430,102
Michigan $261,943 $45,360 $216,583
Georgia $59,788 $59,788 --
Expenses of the Georgia Fund assumed by Lord Abbett for the year ended October
31, 1996 was $24,665.
The Bank of New York ("BNY"), 40 Wall Street, New York, New York 10286, serves
as each Fund's custodian.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281, are
the independent auditors of each Fund and must be approved at least annually by
the Board of Trustees to continue in such capacity. Deloitte & Touche LLP
perform audit services for each Fund, including the examination of
financial statements included in our Annual Report to Shareholders.
United Missouri Bank of Kansas City, N.A., Tenth and Grand, Kansas City,
Missouri 64141, acts as the transfer agent and dividend disbursing agent for
each Fund.
4.
Portfolio Transactions
Each Fund's policy is to obtain best execution on all our portfolio
transactions, which means that each Fund seeks to have purchases and sales of
portfolio securities executed at the most favorable prices, considering all
costs of the transaction including brokerage commissions (if any) and dealer
markups and
markdowns and any brokerage commissions and taking into account the full range
and quality of the brokers' services. Consistent with obtaining best execution,
we generally pay, as described below, a higher commission that some brokers
might charge on the same transaction. This policy with respect to best
execution 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 each Lord Abbett-sponsored 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
obtaining best execution.
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
14
<PAGE>
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 Company; 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 Company, 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 Lord Abbett-sponsored funds 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 the Lord
Abbett-sponsored funds' 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 a Lord Abbett-sponsored fund does, transactions will, to the extent
practicable, be allocated among all participating accounts in proportion to the
amount of each order and will be executed daily until filled so that each
account shares the average price and commission cost of each day. Other clients
who direct that their brokerage business be placed with specific brokers or who
invest through wrap accounts introduced to Lord Abbett by certain brokers may
not participate with us in the buying and selling of the same securities as
described above. If these clients wish to buy or sell the same security as a
Lord Abbett-sponsored fund does, 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 a Lord Abbett-sponsored fund does.
The Lord Abbett-sponsored fund does will not seek "reciprocal" dealer business
(for the purpose of applying commissions in whole or in part for their benefit
or otherwise) from dealers as consideration for the direction to them of
portfolio business.
During the fiscal years ended October 31, 1999, 1998 and 1997 , 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 described in the Prospectus under "Purchases" and
"Redemptions," respectively.
As disclosed in the Prospectus, we calculate our net asset value as of the
close of the New York Stock Exchange ("NYSE")on each day the NYSE is open for
trading by dividing our total net assets by the number of shares outstanding at
the time of calculation. 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.
15
<PAGE>
The Fund values its portfolio securities at 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 Board of Trustees.
For each class of shares the net asset value per share will be
determined by taking the net assets and dividing by the
outstanding shares.
The maximum offering prices of our Class A shares on October 31, 1999 were
computed as follows:
<TABLE>
<CAPTION>
Florida Pennsylvania Georgia Michigan
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
Net asset value per share (net assets
divided by shares outstanding) .................$4.52 $4.81 $4.91 $4.75
Maximum offering price per share (net
asset value divided by .9525) ..................$4.67 $4.97 $5.07 $4.91
</TABLE>
The offering prices of our Class C shares on October 31, 1999 were computed as
follows:
Florida Fund
Net asset value per share (net assets
divided by shares outstanding) .................$4.52
The Fund has entered into a distribution agreement with Lord Abbett Distributor
LLC, a New York limited liability company ("Lord Abbett Distributor"), and
subsidiary of Lord Abbett 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 and carried over to future years 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, 1998 Oct. 31, 1999
------------- ------------- -------------
Gross sales charge $870,073 $904,104 $863,951
Amount allowed
to dealers $769,150 $797,281 $749,070
-------- -------- ---------
Net commissions received
by Lord Abbett Distributor $ 100,923 $ 106,823 $114,881
========= ========= =========
16
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Classes of Shares. The Funds offer different classes of shares as described in
the Prospectus. The different classes of shares represent investments in the
same portfolio of securities but are subject to different expenses and will
likely have different share prices. Investors 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, 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 or on investments that
do not qualify to be under a "special retirement wrap program" as a program
sponsored by an authorized institution showing one or more characteristics
distinguishing it, in the opinion of Lord Abbett Distributor from a mutual fund
wrap fee program). If you purchase Class A shares as part of an investment of at
least $1 million (or for Retirement Plans with at least 100 eligible employees
or under a special retirement wrap program) 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 Fund a contingent deferred sales charge ("CDSC") of 1%
except for redemptions under a special retirement wrap program. Class A shares
are subject to service and distribution fees that are currently estimated to
total annually approximately 0.23 of 1% of the annual net asset value of the
Class A shares. The initial sales charge rates, the CDSC and the Rule 12b-1 plan
applicable to the Class A shares are described in "Buying Class A Shares" below.
Class C Shares. If you buy Class C shares, 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 Fund 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 in "Buying Class C Shares" below.
Which Class of Shares Should You Choose? Once you decide that the Fund 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 financial adviser. The Fund's 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.
In the following discussion, to help provide you and your financial adviser with
a framework in which to choose a class, we have made some assumptions using a
hypothetical investment in the Fund. We used the sales charge rates that apply
to Class A and Class C, and considered the effect of the higher distribution
fees on Class C expenses (which will affect your investment return). Of course,
the actual performance of your investment cannot be predicted and will vary,
based on the Fund's 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 0investment 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.
17
<PAGE>
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 or for investments pursuant to a special retirement
wrap program, in most cases Class A shares will be the most advantageous choice,
no matter how long you intend to hold your shares. For that reason, it may not
be suitable for you to place a purchase order for Class C shares of $1,000,000
or more. In addition, it may not be suitable for you to place an order for C
shares for a Retirement Plan with at least 100 eligible employees or for a
special retirement wrap program. You should discuss this with your financial
advisor.
Investing for the Longer Term. If you are investing for the longer term (for
example, to provide for future college expenses for your child) and do not
expect to need access to your money for seven years or more and you plan to
invest more than $100,000, 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.
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 in
non-Retirement Plan accounts for Class C shareholders during the first year of
share ownership (due to the CDSC on withdrawals during that year). See
"Systematic Withdrawal Plan" under "Shareholder Services" in the Prospectus for
more information about the 12% annual waiver of the CDSC. 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 this class, such as the higher
distribution fee to which Class C shares are subject, as described below.
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 the
distribution fee for Class C shares is the same as the 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.
Class A and Class C Rule 12b-1 Plans. As described in the Prospectus, each Fund
has adopted a Distribution Plan and Agreement pursuant to Rule 12b-1 under the
Act for the Class A shares (all Fund) and the Class C shares (Florida Fund
only): the "A Plans" and the "C" Plan," respectively. The A Plans each become
effective when the required level of net assets for each Fund is reached. The
Florida Funds' A Plan became effective October 1, 1992. The Pennsylvania Fund A
Plan became effective on April 1, 1998. In adopting a Plan for each class of
each Fund 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 be the
case. During the last fiscal year, the Company paid $ and $ through Lord Abbett
to dealers pursuant to the Florida Funds' A Plan and C Plan, respectively. The A
Plans for the Georgia and Michigan Fund are not yet effective. Lord Abbett uses
amounts received under the Florida Funds' A and C Plans as described in the
Prospectus and for payments to dealers for (i) providing
18
<PAGE>
continuous services to the Florida Fund' shareholders, such as answering
shareholder inquiries, maintaining records, and assisting shareholders in making
redemptions, transfers, additional purchases and exchanges and (ii) their
assistance in distributing shares of the Fund, 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 Company 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 Fund 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 its class's
outstanding voting securities.
Contingent Deferred Sales Charges. A Contingent Deferred Sales Charge ("CDSC")
applies, 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, subject to certain exceptions, a
CDSC of 1% is imposed with respect to those Class A shares (or ClassA shares of
another Lord Abbett-sponsored fund or Fund acquired through exchange of such
shares) on which a Fund has paid the one-time distribution fee of 1% 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 Fund only.) As stated in the Prospectus, subject to
certain exceptions, if Class C shares of the Florida Fund are redeemed for cash
before the first anniversary of their purchase, the redeeming shareholder will
be required to pay to the Florida Fund 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 Fund' 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 Fund and is intended
to reimburse all or a portion of the amount paid by the Fund if the shares are
redeemed before the Fund has had an opportunity to realize the anticipated
benefits of having a long-term shareholder account in the Fund.
The other funds and Fund which participate in the Telephone Exchange Privilege
(except (a) Lord Abbett U.S. Government Securities Money Market Fund, Inc.
("GSMMF"), (b) certain Fund of Lord Abbett Tax-Free Income Fund and the Company
for which a Rule12b-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 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
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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 Fund 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 Company 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
Company). 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
Companies" are AMMF and other Lord Abbett-sponsored funds which are eligible for
the exchange privilege, except Lord Abbett Fund Fund ("LASF") which offers its
shares only in connection with certain variable annuity contracts, Lord Abbett
Equity Fund ("LAEF") which is not issuing shares.
Statement Of Intention. Under the terms of the Statement of Intention as
described in the Prospectus 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 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 Company to sell, the full amount indicated.
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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 Company 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.
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 funds before investing.
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Invest-A-Matic. The Invest-A-Matic method of investing in the Company 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 Fund will be treated as a separate entity for federal income tax purposes.
As a result, the status of each Fund as a regulated investment company is
determined separately by the Internal Revenue Service. Each Fund qualified as
regulated investment company for its last fiscal year and intends to do so for
this fiscal year. If any Fund does not qualify it will be taxed as a normal
corporation.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Company may not be deductible, in whole or in part, for federal, state or
local 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 Company even though the borrowed funds may
not be directly traceable to the purchase of shares.
Fund 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 Fund shares.
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 Company. 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 Company.
The value of any shares redeemed by the Company or repurchased or otherwise sold
may be more or less than your tax basis at the time of disposition. Any gain
generally will be taxable for federal income tax purposes. Any loss realized on
the disposition of Company 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 Company 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
Company 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 shares
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 shares
that are substantially identical.
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Each Fund will be subject to a 4% nondeductible excise tax on certain amounts
not distributed or treated as having been distributed on a timely basis each
calendar year. Each Fund intends to distribute to shareholders each year an
amount adequate to avoid the imposition of such excise tax.
Limitations imposed by the Internal Revenue Code on regulated investment
companies may restrict a 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, a Fund 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."
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
Fund, 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.
Except as otherwise discussed in the Prospectus, the receipt of dividends and
distributions from the Funds may be subject to state and local taxes. 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 risks affecting the states and
territory indicated, each of which could affect the bonds purchased by the
Funds. 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. The Funds have not verified any of this information.
Florida Bonds
Florida's economic expansion has been strong, as employment rates continued to
grow steadily. The Florida economy is expecting a mild slowdown of growth.
Because Florida has a proportionately greater retirement age population than the
rest of the nation, property income (dividends, interest and rent and transfer
payments (social and pension benefits, for example) are relatively more
important sources of income.
Florida's economy has performed well in recent years, largely due to rapid
population growth. The State's total personal income has grown at a strong rate
and outperformed the U.S. and other southeastern states. The increase in
personal income directly reflects the population increase. Per capita income has
closely tracked the national average for many years. Florida's unemployment rate
has been below or about the same as the national average since 1995. The
increase in population has placed increased pressure on the State's
transportation infrastructure and other facilities.
Florida's economy is gradually becoming less dependent on employment related to
construction, agriculture and manufacturing and more dependent on services and
trade-related employment. The decline in importance of construction and
construction-related industries is expected to continue, as Florida's economy
diversifies.
Tourism continues to be one of Florida's most important industries. The State
has worked to diversify its tourist attractions, and this diversification has
helped to reduce, to a degree, the seasonal character of the industry and to
stabilize tourist-related employment.
Florida's tax base is relatively narrow, with most of its revenues derived from
the state's sales and use tax. This reliance on a cyclical revenue source
creates some vulnerability. In addition, Florida passed a constitutional
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amendment in 1994 that limits the rate of growth in state revenues. This
limitation, however, exempts revenues pledged to bonds.
Georgia Bonds
Georgia has been one of the fastest-growing states in terms of population, and
has benefited from steady economic growth due to the State's low cost of living,
extensive transportation infrastructure and low unemployment rates.
Nevertheless, Georgia's per capita income remains below the national average.
Georgia's unemployment rate has declined steadily since 1992, and remains below
the national average. The State's per capita income, while it has grown
strongly, is still less than the national average. Personal income levels also
have shown steady increases, as have State revenues.
The State had an undesignated, unreserved General Fund balance of $776 million
in fiscal year 1996-97. In addition, Georgia's Revenue Shortfall Reserve Fund,
which was drawn down to zero in the early 1990s, had a balance of $334 million
at the end of the 1996-97 fiscal year.
The Georgia Constitution provides that the State may incur general obligation
debt and guaranteed revenue debt for public purposes. However, the Georgia
Constitution imposes certain debt limits and controls. General obligation debt
cannot exceed 10 percent of total revenue receipts less refunds of the State
treasury.
Michigan Bonds
Michigan's economic forecast for 1999 projects healthy growth. Michigan's
economy remains heavily concentrated in the manufacturing sector. The State's
automobile industry remains an important component of this sector. Accordingly,
the State's economy is potentially more volatile than those of other states with
more diverse economies and may be more likely to be adversely affected by recent
global economic problems. In recent years, however, the State's economy has
diversified somewhat. Renewed state economic growth has caused the Michigan
unemployment rate to remain slightly below the U.S. unemployment rate for seven
consecutive years, running counter to a historical 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 Constitution provides that the total amount of general ad valorem taxes
imposed on taxable property in any year cannot exceed certain millage
limitations set by the Constitution, statute or charter. The Constitution
prohibits local units of government from levying any tax not authorized by law
or charter, or from increasing the rate of an existing tax above the rate
authorized by law or charter, without the approval of the electors of the local
unit voting on the question. Local units of government and local authorities are
authorized to issue bonds and other evidences of indebtedness in a variety of
situations without the approval of electors, but the ability of the obligor to
levy taxes for the payment of such obligations is subject to the foregoing
limitations unless the obligations were authorized before December 23, 1978 or
approved by the electors. The Constitution also contains millage reduction
provisions. Under such provisions, should the value of taxable property
(exclusive of construction and improvements) increase at a percentage greater
than the percentage increase in the Consumer Price Index, the maximum authorized
tax rate would be reduced by a factor which would result in the same maximum
potential tax revenues to the local taxing unit as if the valuation of taxable
property (less new construction and improvements) had grown only at the Consumer
Price Index rate instead of at the higher actual growth rate. Thus, if taxable
property values rise faster than consumer prices, the maximum authorized tax
rate would be reduced accordingly.
As of September 30, 1998, Michigan's outstanding general obligation debt totaled
approximately $874 million.
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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. The revenue limit does not apply to taxes
imposed for the payment of principal of and interest on bonds of the State, if
the bonds are approved by voters and authorized by a vote of two-thirds of the
members of each House of the Legislature. The Constitution also provides that
the proportion of State spending paid to all local units of government to total
State spending may not be reduced below the proportion in effect in the 1978-79
fiscal year.
The State is a party to various legal proceedings seeking damages or injunctive
or other relief. In addition to routine litigation, certain of these proceedings
could, if unfavorably resolved from the point of view of the State,
substantially affect State programs or finances.
Pennsylvania Bonds
Pennsylvania is an established, yet growing state with a diversified economy.
Many major corporations have their headquarters in Pennsylvania. Pennsylvania
has been historically identified as a heavy-industry state, although that
reputation has changed over the last 30 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.
Agriculture also remains an important part of the State's economy.
Pennsylvania's unemployment rate has declined steadily since its peak in 1992,
and in 1998 was equal to the national average. However, employment growth
continues to lag behind the national average.
The fiscal years 1993 through 1998 were characterized by steady, 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 tax revenue and
total revenue gains during the period. In fiscal year 1998, the Commonwealth had
a significant operating surplus.
Per capita income in Pennsylvania has continued to grow and remains above the
national average. Concurrently, unemployment has continued to decrease and is
now equal to the U.S. average.
The Pennsylvania Constitution mandates that the total operating budget
appropriations made by Commonwealth's General Assembly may not exceed the sum of
(a) the actual and estimated revenues in any given year, and (b) the surplus of
the preceding year. The Pennsylvania Constitution permits 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.
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.
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.
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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
obligation of the Commonwealth. Some of these agencies, however, indirectly
depend on Commonwealth appropriations.
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. Some of
those leases and their respective lease payments are pledged as security for
debt obligations issued by certain public authorities for other entities within
the State. All lease payments due from Commonwealth departments and agencies are
subject to and depend on an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law to
appropriate or otherwise provide monies from which the lease payments are to be
paid. The obligations to be paid from such lease payments are not bonded debt of
the Commonwealth.
The Commonwealth established the Pennsylvania Intergovernmental Cooperation
Authority ("PICA") in 1991 to assist Philadelphia in remedying fiscal
emergencies. Philadelphia is currently operating under a five-year fiscal plan
approved by PICA on May 20, 1997.
Puerto Rico Bonds
Each fund may invest in bonds issued by the Commonwealth of Puerto Rico and its
instrumentalities. The economy of Puerto Rico is dominated by the manufacturing
and service sectors. Puerto Rico's economic health is closely tied to the price
of oil and the state of the U.S. economy. Although its unemployment rate has
generally declined in recent years, Puerto Rico's unemployment rate continues to
substantially exceed the U.S. average. Puerto Rico's economy has experienced
significant growth. Continued growth depends on factors, such as the state of
the U.S. economy, stability of the price of oil and borrowing costs.
Puerto Rico's manufacturing sector has become more diversified as industrial
development has become more capital intensive and more dependent on skilled
labor. The service sector, including wholesale and retail trade, finance,
insurance and real estate, also plays a major role in the economy. The service
sector ranks second only to manufacturing in contribution to the gross domestic
product and leads all sectors in providing employment. In recent years, the
service sector has experienced significant growth in response to and paralleling
the expansion of the manufacturing sector.
Much of the development of the manufacturing sector in Puerto Rico 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 on certain income from operations and the
Commonwealth's Industrial Incentives Program. However, in 1996 amendments were
passed that phase out Section 936 tax credits over ten years for existing
claimants and eliminate it for corporations without established operations after
October 1995. The long-term effects on the Puerto Rico economy of the repeal of
section 936 cannot yet be determined, although the repeal is not expected to
have material adverse effects on the Commonwealth's economy in the short- or
medium-term. The Commonwealth also needs to address its substantial unfunded
pension liabilities to its two main public pension systems.
Puerto Rico's economy has continued to expand for over a decade, with almost
every sector participating and resulting in record levels of employment
(although Puerto Rico's unemployment rate has continued to substantially 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 Commonwealth's general fund has had a positive cash balance in recent years,
but was forecast to decrease by $266.6 million by the end of fiscal 1999.
The Constitution of Puerto Rico provides that public debt of the Commonwealth
will constitute a first claim on
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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.
In recent years the Commonwealth has had higher levels of public sector debt
compared to the growth in nominal gross product. These higher levels are due to
the increase during fiscal 1996, 1997, and 1998 in the amount of debt incurred
to finance infrastructure projects. This trend is expected to continue during
the next few fiscal years as the level of public sector capital investment
remains high.
8.
Performance
Each Fund 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 Fund' 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, 1999 for Class A shares of
the Florida, Georgia, Michigan and Pennsylvania Fund were: -4.74%, -4.36%,
- -3.55% and -4.13%, respectively. The average annual compounded rates of total
return for the five year period ended October 31, 1999 for the Florida Fund and
the life of the Florida Fund (commencing on September 25, 1991 to October 31,
1999), the life of the Georgia Fund (commencing on December 27, 1994 to October
31, 1999), the life of the Pennsylvania Fund (commencing on February 3, 1992 to
October 31, 1999) and the life of the Michigan Fund (commencing on December 1,
1992 to October 31, 1999), were as follows: 5.42 %, 5.29%, 6.79%, 5.99% and
5.74%, respectively.
The total return for the Class C shares of the Florida Fund for the year ended
October 31, 1999, 1998 and the life of the class (commencing July 15, 1996 to
October 31, 1999) was -5.43% and 3.13%, 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
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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, 1999 the yields for Class A shares of the Florida, Georgia,
Pennsylvania and Michigan Fund were 4.47%, 4.63 %, 4.77 % and 4.63 %,
respectively. The yield for Class C shares of the Florida Fund for such 30 day
period was 3.98 %.
Each Funds' 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, 1999, the tax-equivalent yields for Class A
shares of the Florida, Georgia, Pennsylvania and Michigan Fund were 6.98%, 7.70
%, 7.80%, and 7.44%, respectively. The tax-equivalent yield for Class C shares
of the Florida Fund for such 30 day period was 6.22 %.
It is important to remember that these figures represent past performance and an
investor should be aware that the investment return and principal value of a
Fund investment will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Therefore, there is no assurance
that this performance will be repeated in the future.
9.
Information About the Fund
The Company was established on September 11, 1991 as a Massachusetts business
trust by a Declaration of Trust. As a Trust, the Company does not hold regular
meetings of shareholders, although special meetings may be called for a specific
Fund or for the Company as a whole, for purposes such as electing or removing
trustees, changing fundamental policies or approving an advisory contract. The
Company 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 Company'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
Company 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 Company's mailing their request.
Lord Abbett Tax-Free Income Trust (the "Company") was organized as a
Massachusetts Business Trust on September 11, 1991. The Company's Board of
Trustees has authority to create separate series of shares of beneficial
interest, without further action by shareholders. To date, the Company has four
series: the Florida Fund, the Georgia Fund, the Michigan Fund and the
Pennsylvania Fund (each a "Fund"). The Florida Fund consists of three classes of
shares: Class A, C and P. The other Funds consist of a two classes of shares:
Class A and P. Although no present plans exist, further funds and/or classes may
be added in the future.
Rule 18f-2 under The Investment Company Act of 1940, as amended (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 Company 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 funds affected by such matter. Rule
18f-2 further provides that a class or fund shall be deemed to be affected by a
matter unless the interests of each class or funds in the matter are
substantially identical or the matter does not affect any interest of such class
or fund. However, the Rule exempts the selection of independent public
accountants, the approval of principal distribution contracts and the election
of trustees from the separate voting requirements of the Rule.
Under the Declaration of Trust, the trustees may provide for additional funds
and classes from time to time. Any additional fund and class would have rights
separate from the other funds and classes. Within each fund and class, all
shares have equal voting rights and equal rights with respect to dividends,
assets and liquidation.
Under Massachusetts law, shareholders could, under certain circumstances, be
held liable for the obligations of the Company. However, the Declaration of
Trust disclaims shareholder liability for acts, obligations or affairs of
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the Company and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Company or
the Trustees. The Declaration of Trust also provides for indemnification out of
a Funds' property for all losses and expenses of any shareholder of the Fund
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 Fund itself would be unable to meet its
obligations. The Company 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 Company'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, 1999 and the
report of Deloitte & Touche LLP, independent auditors, on such financial
statements in the 1999 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.
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