Filed with the Securities and Exchange Commission on February 27, 1998.
File No. 2-57139
File No. 811-2671
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
-----
Post-Effective Amendment No. 35
-----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26
-----
Scudder Municipal Trust
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
---------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
--------------
Thomas F. McDonough
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
--------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b)
---
X on March 1, 1998 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(i)
---
on March 1, 1998 pursuant to paragraph (a)(i)
---
75 days after filing pursuant to paragraph (a)(ii)
---
on ____________ pursuant to paragraph (a)(ii) of Rule 485
---
If appropriate, check the following:
this post-effective amendment designates a new effective date
--- for a previously filed post-effective amendment
<PAGE>
SCUDDER MANAGED MUNICIPAL BONDS
AND
SCUDDER HIGH YIELD TAX FREE FUND
CROSS-REFERENCE SHEET
Items Required By Form N-1A
PART A
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description SCUDDER MANAGED MUNICIPAL
of Registrant BONDS--Investment objective and
policies, investments
SCUDDER HIGH YIELD TAX FREE
FUND--Investment objective and
policies, investments
ADDITIONAL INFORMATION ABOUT POLICIES
AND INVESTMENTS
FUND ORGANIZATION
5. Management of the Fund A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser;
transfer agent
SHAREHOLDER BENEFITS--A team approach to
investing
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and DISTRIBUTION AND PERFORMANCE
Other Securities INFORMATION--Dividends and capital
gains distributions
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--Toll-free
Telephone Service and Information,
T.D.D. Service for the Hearing
Impaired, Dividend reinvestment plan
HOW TO CONTACT SCUDDER
7. Purchase of PURCHASES
Securities Being TRANSACTION INFORMATION--Purchasing
Offered shares
INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or EXCHANGES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal NOT APPLICABLE
Proceedings
Cross Reference - Page 1
<PAGE>
PART B
Caption in Statement
Item No. Item Caption of Additional Information
-------- ------------ -------------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information ORGANIZATION OF THE FUNDS
and History
13. Investment Objectives THE FUNDS AND THEIR OBJECTIVES
and Policies
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER
and Other Services DISTRIBUTOR
ADDITIONAL INFORMATION--Experts, Other
Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS--Brokerage
and Other Practices
18. Capital Stock and ORGANIZATION OF THE FUNDS
Other Securities
19. Purchase, Redemption PURCHASES
and Pricing of EXCHANGES AND REDEMPTIONS
Securities Being FEATURES AND SERVICES OFFERED BY THE
Offered FUNDS--Dividend and Capital Gain
Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status DIVIDENDS
TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of PERFORMANCE INFORMATION
Performance Data
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 2
<PAGE>
This combined prospectus sets forth concisely the information a prospective
investor should know before investing in the following funds: Scudder Tax Free
Money Fund; Scudder Limited Term Tax Free Fund and Scudder Medium Term Tax Free
Fund, each a diversified series of Scudder Tax Free Trust; Scudder Managed
Municipal Bonds and Scudder High Yield Tax Free Fund, each a diversified series
of Scudder Municipal Trust. All three Trusts are open-end management investment
companies. Please retain this prospectus for future reference.
SCUDDER HIGH YIELD TAX FREE FUND MAY INVEST UP TO 50% OF ITS ASSETS IN LOWER
QUALITY BONDS, COMMONLY REFERRED TO AS JUNK BONDS. BONDS OF THIS TYPE ARE
CONSIDERED TO BE SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN
OF PRINCIPAL. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.
If you require more detailed information, the Funds' Statement of Additional
Information dated March 1, 1998, as amended from time to time, may be obtained
without charge by writing Scudder Investor Services, Inc., Two International
Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission and is available along with other related
materials on the SEC's Internet web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents--see page 10.
- -----------------------------------------
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
- -----------------------------------------
code [LOGO] PRINTED WITH [LOGO] Printed on recycled paper
goes SOYINK
here
SCUDDER [LOGO]
Scudder Tax Free
Money Fund
Scudder Limited Term
Tax Free Fund
Scudder Medium Term
Tax Free Fund
Scudder Managed
Municipal Bonds
Scudder High Yield
Tax Free Fund
- ------------------------------
March 1, 1998
Prospectus
Five pure no-load(TM) (no sales charges) mutual funds seeking tax-free income
through different investment objectives.
Shares of the Funds are not insured or guaranteed by the U.S. Government.
Scudder Tax Free Money Fund seeks to maintain a constant net asset value of
$1.00 per share but there can be no assurance that a stable net asset value will
be maintained.
<PAGE>
- ---------------------------------------
Expense information
- ---------------------------------------
- --------------------------------------------------------------------------------
How to compare a Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Tax Free Money Fund and Scudder Medium Term Tax
Free Fund. By reviewing this table and those in other mutual funds'
prospectuses, you can compare each Fund's fees and expenses with those of other
funds. With Scudder's pure no-load(TM) funds, you pay no commissions to purchase
or redeem shares, or to exchange from one fund to another. As a result, all of
your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in either Fund for various transactions.
<TABLE>
<CAPTION>
Scudder Tax Free Scudder Medium
Money Fund Term Tax Free Fund
---------- ------------------
<S> <C> <C>
Sales commissions to purchase shares (sales load) NONE NONE
Commissions to reinvest dividends NONE NONE
Redemption fees NONE* NONE*
Fees to exchange shares NONE NONE
</TABLE>
2) Annual Fund operating expenses: Expenses paid by either Fund before it
distributes its net investment income, expressed as a percentage of its
average daily net assets for the year ended December 31, 1997.
Investment management fees 0.50% + 0.58%
12b-1 fees NONE NONE
Other expenses 0.26% 0.16%
---- ----
Total Fund operating expenses 0.76% + 0.74%
==== ====
Example
Based on the levels of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by each Fund before it distributes its
net investment income to shareholders. (As noted above, the Funds have no
redemption fees of any kind.)
One year $ 8 $ 8
Three years 24 24
Five years 42 41
Ten years 94 92
See "Fund organization--Investment adviser" for further information about the
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Funds or by Write-A-Check. If you
wish to receive redemption proceeds via wire, there is a $5 wire service
fee. For additional information, please refer to "Transaction
information--Redeeming shares."
+ Until April 30, 1998, the Adviser has agreed to waive a portion of its fee
to the extent necessary so that the total annualized expenses of the Fund
do not exceed 0.65% of average daily net assets. Expenses shown above are
restated to reflect what the Fund would have paid during the fiscal year
ended December 31, 1997, absent such waiver. Actual expenses for the
fiscal year ended December 31, 1997 were: investment management fee 0.39%,
other expenses 0.26% and total Fund operating expenses 0.65%.
- --------------------------------------------------------------------------------
- --
2
<PAGE>
- ---------------------------------------
Expense information
- ---------------------------------------
- --------------------------------------------------------------------------------
How to compare a Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Managed Municipal Bonds and Scudder High Yield
Tax Free Fund. By reviewing this table and those in other mutual funds'
prospectuses, you can compare each Fund's fees and expenses with those of other
funds. With Scudder's pure no-load(TM) funds, you pay no commissions to purchase
or redeem shares, or to exchange from one fund to another. As a result, all of
your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in either Fund for various transactions.
<TABLE>
<CAPTION>
Scudder Managed Scudder High Yield
Municipal Bonds Tax Free Fund
--------------- -------------
<S> <C> <C>
Sales commissions to purchase shares (sales load) NONE NONE
Commissions to reinvest dividends NONE NONE
Redemption fees NONE* NONE*
Fees to exchange shares NONE NONE
</TABLE>
2) Annual Fund operating expenses: Expenses paid by either Fund before it
distributes its net investment income, expressed as a percentage of its
average daily net assets for the year ended December 31, 1997.
Investment management fees 0.51% 0.67%
12b-1 fees NONE NONE
Other expenses 0.13% 0.23%
---- ----
Total Fund operating expenses 0.64% 0.90%
==== ====
Example
Based on the levels of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by each Fund before it distributes its
net investment income to shareholders. (As noted above, the Funds have no
redemption fees of any kind.)
One year 7 $9
Three years 20 29
Five years 36 50
Ten years 80 111
See "Fund organization--Investment adviser" for further information about the
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Funds. If you wish to receive
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction
information--Redeeming shares."
- --------------------------------------------------------------------------------
--
3
<PAGE>
- ---------------------------------------
Expense information
- ---------------------------------------
- --------------------------------------------------------------------------------
How to compare a Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Limited Term Tax Free Fund (the "Fund"). By
reviewing this table and those in other mutual funds' prospectuses, you can
compare the Fund's fees and expenses with those of other funds. With Scudder's
pure no-load(TM) funds, you pay no commissions to purchase or redeem shares, or
to exchange from one fund to another. As a result, all of your investment goes
to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Scudder Limited Term
Tax Free Fund
-------------
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended October 31,
1997.
Investment management fee (after waiver) 0.52%**
12b-1 fees NONE
Other expenses (after reimbursement) 0.23%**
----
Total Fund operating expenses (after waiver and reimbursements) 0.75%**
====
Example
Based on the level of Fund operating expenses listed above, the total expenses
relating to a $1,000 investment, assuming a 5% annual return and redemption at
the end of each period, are listed below. Investors do not pay these expenses
directly; they are paid by the Fund before it distributes its net investment
income to shareholders. (As noted above, the Fund has no redemption fees of any
kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$8 $24 $42 $93
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund or by Write-A-Check. If you
wish to receive your redemption proceeds via wire, there is a $5 wire
service fee. For additional information, please refer to "Transaction
information--Redeeming shares."
** Until February 28, 1999, the Adviser has agreed to reimburse Fund
operating expenses and waive a portion of its fee to the extent necessary
so that the total annualized expenses of the Fund do not exceed 0.75% of
average daily net assets. If the Adviser had not agreed to waive and/or
reimburse a portion of its fee for the fiscal period ended October 31,
1997, the Fund's expenses would have been: investment management fee
0.60%, other expenses 0.23% and total operating expenses 0.83%.
- --------------------------------------------------------------------------------
- --
4
<PAGE>
- ---------------------------------------
Financial highlights
- ---------------------------------------
Scudder Tax Free Money Fund
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning -----------------------------------------------------------------------------------------
of period .......................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-----------------------------------------------------------------------------------------
Net investment income ................. .031 .029 .032 .022 .018 .025 .041 .053 .057 .046
Less distributions from net
investment income .................. (.031) (.029) (.032) (.022) (.018) (.025) (.041) (.053) (.057) (.046)
-----------------------------------------------------------------------------------------
Net asset value, end of period ........ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ...................... 3.10 2.91 3.27 2.26 1.86 2.54 4.20 5.44 5.83 4.73
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 283 220 239 257 222 267 279 303 279 358
Ratio of operating expenses net,
to average daily net assets (%) .... .65 .70 .75 .77 .75 .73 .70 .72 .70 .67
Ratio of operating expenses before
expense reductions to average
daily net assets ................... .76 .75 .75 .77 .75 .73 .70 .72 .70 .67
Ratio of net investment income
to average daily net assets (%) .... 3.06 2.86 3.21 2.24 1.84 2.53 4.12 5.30 5.67 4.61
</TABLE>
- --------------------------------------------------------------------------------
--
5
<PAGE>
- ---------------------------------------
Financial highlights
- ---------------------------------------
Scudder Medium Term Tax Free Fund
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
Net asset value, beginning
of period ......................... $11.15 $11.26 $10.39 $11.36 $10.86 $10.62 $10.11 $10.04 $10.02 $10.07
--------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............. .52 .53 .54 .53 .60 .65 .67 .54 .56 .54
Net realized and unrealized gain
(loss) on investments ............. .31 (.09) .92 (.92) .56 .27 .52 .07 .02 (.05)
--------------------------------------------------------------------------------------------
Total from investment operations .... .83 .44 1.46 (.39) 1.16 .92 1.19 .61 .58 .49
--------------------------------------------------------------------------------------------
Less distributions:
From net investment income .......... (.52) (.53) (.54) (.53) (.60) (.65) (.67) (.54) (.56) (.54)
From net realized gains on
investments ....................... (.05) (.02) (.05) (.05) (.06) (.03) (.01) -- -- --
--------------------------------------------------------------------------------------------
Total distributions ................. (.57) (.55) (.59) (.58) (.66) (.68) (.68) (.54) (.56) (.54)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net asset value, end of period ...... $11.41 $11.15 $11.26 $10.39 $11.36 $10.86 $10.62 $10.11 $10.04 $10.02
--------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ................ 7.69 4.02 14.32 (3.50) 10.94 8.93 12.13 6.29 6.00 4.92
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 657 651 712 701 1,017 661 268 27 54 99
Ratio of operating expenses net,
to average daily net assets (%) ... .74 .72 .70 .63 .14 -- -- .97 .91 .79
Ratio of operating expenses before
expense reductions, to average
daily net assets .................. .74 .72 .72 .71 .75 .80 .88 1.00 .91 .79
Ratio of net investment income to
average daily net assets (%) ...... 4.67 4.75 4.92 4.94 5.35 6.07 6.44 5.37 5.62 5.05
Portfolio turnover rate (%) ......... 13.4 14.1 36.1 33.8 37.3 22.4 14.0 116.9 15.7 31.2
</TABLE>
On November 1, 1990, the Fund adopted its present name and objective. Prior to
that date, the Fund was known as the 1990 Portfolio of the Scudder Tax Free
Target Fund and its objective was to provide high tax-free income and current
liquidity. Financial information for each of the three years in the period ended
December 31, 1990 should not be considered representative of the present Fund.
(a) Total returns may have been lower had certain expenses not been reduced.
- --------------------------------------------------------------------------------
- --
6
<PAGE>
- ---------------------------------------
Financial highlights
- ---------------------------------------
Scudder Managed Municipal Bonds
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Net asset value, beginning of period .. $8.84 $8.94 $8.07 $9.09 $8.72 $8.80 $8.45 $8.54 $8.60 $8.24
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ................. .46 .45 .48 .46 .47 .51 .53 .55 .59 .60
Net realized and unrealized gain
(loss) on investment transactions ... .34 (.10) .87 (1.00) .66 .25 .47 -- .33 .38
------------------------------------------------------------------------------------------
Total from investment operations ...... .80 .35 1.35 (.54) 1.13 .76 1.00 .55 .92 .98
------------------------------------------------------------------------------------------
Less distributions:
From net investment income ............ (.46) (.45) (.48) (.46) (.47) (.51) (.53) (.55) (.59) (.60)
From net realized gains on
investment transactions ............. (.05) -- -- -- (.29) (.33) (.12) (.09) (.39) (.02)
In excess of net realized gains ....... -- -- -- (.02) -- -- -- -- -- --
------------------------------------------------------------------------------------------
Total distributions ................... (.51) (.45) (.48) (.48) (.76) (.84) (.65) (.64) (.98) (.62)
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $9.13 $8.84 $8.94 $8.07 $9.09 $8.72 $8.80 $8.45 $8.54 $8.60
------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ...................... 9.29 4.15 17.12 (6.04) 13.32 8.98 12.23 6.77 11.19 12.27
Ratios and Supplemental Data
Net assets, end of period
($ millions) ........................ 728 737 775 709 910 830 796 719 691 635
Ratio of operating expenses to
average net assets (%) .............. .64 .63 .63 .63 .63 .63 .64 .61 .62 .61
Ratio of net investment income
to average net assets (%) ........... 5.12 5.20 5.59 5.41 5.21 5.76 6.16 6.61 6.78 7.13
Portfolio turnover rate (%) ........... 9.8 12.2 17.8 33.7 52.8 59.6 32.4 72.1 89.8 75.5
</TABLE>
- --------------------------------------------------------------------------------
--
7
<PAGE>
- ---------------------------------------
Financial highlights
- ---------------------------------------
Scudder High Yield Tax Free Fund
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
Net asset value, beginning
of period .......................... $12.04 $12.19 $10.86 $12.55 $11.90 $11.67 $11.19 $11.35 $11.06 $10.52
-------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ................ .67 .66 .68 .70 .67 .72 .76 .77 .76 .83
Net realized and unrealized gain
(loss) on investments .............. .74 (.15) 1.37 (1.73) .93 .50 .69 (.11) .35 .54
-------------------------------------------------------------------------------------------
Total from investment operations ..... 1.41 .51 2.05 (1.03) 1.60 1.22 1.45 .66 1.11 1.37
-------------------------------------------------------------------------------------------
Less distributions:
From net investment income ........... (.67) (.66) (.72) (.66) (.67) (.72) (.76) (.77) (.76) (.83)
From net realized gains on
investment transactions ............ -- -- -- -- (.21) (.27) (.21) (.05) (.06) --
In excess of net realized gains ...... -- -- -- -- (.07) -- -- -- -- --
-------------------------------------------------------------------------------------------
Total distributions .................. (.67) (.66) (.72) (.66) (.95) (.99) (.97) (.82) (.82) (.83)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net asset value, end of period ....... $12.78 $12.04 $12.19 $10.86 $12.55 $11.90 $11.67 $11.19 $11.35 $11.06
-------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ..................... 12.04 4.43 19.28 (8.38) 13.85 10.88 13.36 6.02 10.32 13.48
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 337 293 304 260 317 204 160 129 114 74
Ratio of operating expenses, net
to average daily net assets (%) .... .90 .91 .80 .80 .92 .98 1.00 1.00 1.00 .67
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............... .90 .95 .94 .97 .98 .99 1.04 1.09 1.15 1.25
Ratio of net investment income
to average net assets (%) .......... 5.43 5.59 5.77 6.01 5.38 6.10 6.65 6.88 6.72 7.65
Portfolio turnover rate (%) .......... 33.2 21.9 27.3 34.3 56.4 56.6 45.5 33.4 75.8 36.7
</TABLE>
- --------------------------------------------------------------------------------
- --
8
<PAGE>
- ---------------------------------------
Financial highlights
- ---------------------------------------
Scudder Limited Term Tax Free Fund
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated October 31, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the Period
February 15, 1994
(commencement
Years Ended October 31, of operations) to
October 31,
1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
--------------------------------------------------
Net asset value, beginning of period ................... $11.98 $12.01 $11.67 $12.00
--------------------------------------------------
Income from investment operations:
Net investment income .................................. .52 .53 .56 .38
Net realized and unrealized gain
(loss) on investments ................................ .16 (.02) .34 (.33)
--------------------------------------------------
Total from investment operations ....................... .68 .51 .90 .05
--------------------------------------------------
Less distributions from:
Net investment income .................................. (.52) (.53) (.56) (.38)
Net realized gain on investment
transactions ......................................... (.02) (.01) -- --
--------------------------------------------------
Total distributions .................................... (.54) (.54) (.56) (.38)
--------------------------------------------------
--------------------------------------------------
Net asset value, end of period ......................... $12.12 $11.98 $12.01 $11.67
--------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ................................... 5.89 4.33 7.94 .44**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................. 117 124 122 68
Ratio of operating expenses, net to
average daily net assets (%) ......................... .75 .63 .23 --
Ratio of operating expenses before expense
reductions, to average daily net assets (%) (a) ...... .83 .82 .85 1.29*
Ratio of net investment income to average daily
net assets (%) ....................................... 4.32 4.46 4.78 4.84*
Portfolio turnover rate (%) ............................ 17.8 37.7 37.5 36.3*
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
- --------------------------------------------------------------------------------
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9
<PAGE>
- ---------------------------------------
A message from the President
- ---------------------------------------
[PHOTO]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $200 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts. It is one of the ten
largest mutual fund companies in the U.S.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 45 no-load mutual fund portfolios. We also manage
the mutual funds in a special program for the American Association of Retired
Persons, as well as the fund options available through Scudder Horizon Plan, a
tax-advantaged variable annuity. We also advise The Japan Fund, and numerous
other open and closed-end funds that invest in this country and other countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to shareholders include toll-free access to the professional
service representatives of Scudder Investor Relations, easy exchange among
funds, shareholder reports, informative newsletters and the walk-in convenience
of Scudder Investor Centers.
The Scudder Family of Funds includes those Funds, or classes of Funds, advised
by Scudder Kemper Investments, Inc., that are offered without commissions to
purchase or redeem shares or to exchange from one fund to another. There are no
12b-1 fees either, which many other funds now charge to support their marketing
efforts. All of your investment goes to work for you. We look forward to
welcoming you as a shareholder.
/s/ Edmond D. Villani
- ---------------------------------------
Scudder tax free funds
- ---------------------------------------
Five pure no-load(TM) (no sales charges) mutual funds seeking tax-free income
through different investment objectives:
o Scudder Tax Free Money Fund
o Scudder Limited Term Tax Free Fund
o Scudder Medium Term Tax Free Fund
o Scudder Managed Municipal Bonds
o Scudder High Yield Tax Free Fund
- ---------------------------------------
Contents
- ---------------------------------------
Investment characteristics ................................................. 17
Scudder Tax Free Money Fund ................................................ 18
Scudder Limited Term Tax Free Fund ......................................... 20
Scudder Medium Term Tax Free Fund .......................................... 21
Scudder Managed Municipal Bonds ............................................ 22
Scudder High Yield Tax Free Fund ........................................... 24
Selecting among the Funds .................................................. 25
Additional information about policies
and investments .......................................................... 27
Distribution and performance information ................................... 31
Fund organization .......................................................... 32
Summary of important features .............................................. 34
Transaction information .................................................... 35
Shareholder benefits ....................................................... 39
Purchases .................................................................. 41
Exchanges and redemptions .................................................. 42
Appendix ................................................................... 44
Trustees and Officers ...................................................... 46
Investment products and services
How to contact Scudder ..................................................... 52
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10
<PAGE>
- ---------------------------------------
Investment characteristics
- ---------------------------------------
Scudder Tax Free Money Fund, Scudder Limited Term Tax Free Fund, Scudder Medium
Term Tax Free Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax
Free Fund (collectively the "Funds" and individually, the "Fund") are tax-free
income funds advised by Scudder Kemper Investments, Inc. (the "Adviser"). The
five Funds' prospectuses are presented together so you can understand their
important differences and decide which Fund or combination of Funds is most
suitable for your investment needs.
Tax-free income
The five Funds have different investment objectives and characteristics, yet
they all seek to provide income that is, in the opinion of bond counsel, free
from regular federal income tax, by investing in municipal securities. Municipal
securities include notes and bonds issued by states, cities and towns to raise
revenue for various public purposes.
Depending on your tax bracket, your return from these Funds may be substantially
higher than the after-tax return you would earn from comparable taxable
investments. The chart below shows what an investor would have to earn from a
comparable taxable investment to equal the tax-free yield provided by the Funds
for the period ended December 31, 1997.
Maturity of investments
A significant difference among these five Scudder tax-free funds is the average
maturity of their investments.
Scudder Tax Free Money Fund invests primarily in short-term municipal notes and
maintains a dollar-weighted average portfolio maturity of 90 days or less.
Scudder Limited Term Tax Free Fund invests primarily in shorter-term, high-grade
municipal debt securities and maintains a dollar-weighted average effective
maturity of between one and five years. Scudder Medium Term Tax Free Fund
invests primarily in high-grade intermediate-term municipal bonds (i.e.,
dollar-weighted average effective portfolio maturity of between five and 10
years). Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund
each have flexible investment policies regarding maturity, but both normally
invest in long-term municipal securities (i.e., having more than 10 year
maturities). The yield and the potential for price fluctuation are generally
greater, the longer the maturity of the municipal security.
- --------------------------------------------------------------------------------
TAX-FREE YIELDS and CORRESPONDING TAXABLE EQUIVALENTS
<TABLE>
<CAPTION>
Tax-Free Yield Taxable
for the 30-day period Equivalent Yield**
ended
28% Tax 31% Tax 36% Tax 39.6% Tax
December 31, 1997 Bracket Bracket Bracket Bracket
----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Scudder Tax Free Money Fund* 3.45% 4.79% 5.00% 5.39% 5.71%
Scudder Limited Term Tax Free Fund 3.70% 5.14% 5.36% 5.78% 6.13%
Scudder Medium Term Tax Free Fund 3.89% 5.40% 5.64% 6.08% 6.44%
Scudder Managed Municipal Bonds 4.28% 5.94% 6.20% 6.69% 7.09%
Scudder High Yield Tax Free Fund 4.57% 6.35% 6.62% 7.14% 7.57%
</TABLE>
* The tax-free yield for Scudder Tax Free Money Fund is for the seven-day
period ended December 31, 1997.
** Based on federal income tax rates in effect for the 1997 taxable year. The
yield levels of tax-free and taxable investments continuously change.
Before investing in a Scudder tax-free fund, you may want to compare its
yield to the after-tax yield of an investment paying taxable income.
For up-to-date yield information on these Scudder tax-free funds,
shareholders can call SAIL, Scudder Automated Information Line, toll-free,
at any time: 1-800-343-2890.
- --------------------------------------------------------------------------------
--
11
<PAGE>
Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund have
historically had the highest yields of the five Funds since these Funds usually
have the longest average maturities. Scudder Tax Free Money Fund, which seeks to
maintain a share price of $1.00 and invests in shorter-term securities, offers
the greatest capital protection of these five Funds.
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free Fund, Scudder
Managed Municipal Bonds and Scudder High Yield Tax Free Fund are designed to
offer, on average, more income than Scudder Tax Free Money Fund. Scudder Limited
Term Tax Free Fund and Scudder Medium Term Tax Free Fund offer greater price
stability but lower yield potential than Scudder Managed Municipal Bonds and
Scudder High Yield Tax Free Fund. This price stability reduces the impact of
interest rate changes on the Fund's share price, but does not eliminate credit
risk.
Other factors in addition to maturity affect the yield and price fluctuation of
each Fund, including the absolute level of interest rates, the relationship
among short-, medium- and long-term interest rates, the quality of the Fund's
investments and the Fund's expenses. The share prices of Scudder Limited Term
Tax Free Fund, Scudder Medium Term Tax Free Fund, Scudder Managed Municipal
Bonds and Scudder High Yield Tax Free Fund tend to rise as interest rates
decline and decline as interest rates rise.
Except as otherwise indicated, each Fund's investment objectives and policies
are not fundamental and may be changed without a vote of shareholders. If there
is a change in investment objective, shareholders should consider whether that
Fund remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that a Fund's objectives will be
met.
- ---------------------------------------
Scudder Tax Free Money Fund
- ---------------------------------------
Investment objectives and policies
Scudder Tax Free Money Fund, a diversified open-end management investment
company, seeks to provide income exempt from regular federal income tax and
stability of principal through investments in municipal securities. All of the
Fund's investments are high quality, have a remaining maturity of 397 calendar
days or less and have minimal credit risk as determined by the Adviser. The
dollar-weighted average maturity of the Fund's portfolio is 90 days or less.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in extreme circumstances this may not be possible. A small portion of
the income may be subject to regular federal, alternative minimum, state and
local income taxes.
Investments
All of the Fund's municipal securities must meet certain quality criteria at the
time of purchase. Generally, the Fund may purchase only securities which are
rated, or issued by an issuer rated, within the two highest quality rating
categories of two or more of the following rating agencies: Moody's Investors
Service, Inc. ("Moody's") (Aaa and Aa, MIG 1 and MIG 2, and P1 and P-2),
Standard & Poor's Corporation ("S&P") (AAA and AA, SP1+ and SP1, A1+ and A1 and
A-2) and Fitch Investors Service, Inc. ("Fitch") (AAA and AA, F1 and F2). Where
only one rating agency has rated a security (or its issuer), the Fund generally
may purchase that security as long as the rating falls within the categories
described above. Where a security (or its issuer) is unrated, the Fund may
purchase that security if, in the judgment of the Adviser, it is comparable in
quality to securities described above. All of the securities in which the Fund
may invest are
- --
12
<PAGE>
dollar-denominated and must meet credit standards applied by the Adviser
pursuant to procedures established by the Trustees. Should an issue of municipal
securities cease to be rated or if its rating is reduced below the minimum
required for purchase by the Fund, the Adviser will dispose of any such security
unless the Trustees of the Fund determine that such disposal would not be in the
best interests of the Fund.
Amendments have been adopted to the federal rules regulating quality, maturity
and diversification requirements of money market funds like the Fund. Money
market funds must comply with the revised rules by July 1, 1998. The Fund
intends to be in compliance with the amended requirements by that date.
The Fund may also invest in when-issued securities, whose market value may
involve an unrealized gain or loss prior to settlement. In addition the Fund may
invest, to a limited extent, in illiquid or restricted securities.
Municipal securities in which the Fund may invest include municipal notes,
short-term municipal bonds, variable rate demand instruments and tax-exempt
commercial paper. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Examples
include tax anticipation and revenue anticipation notes, which are generally
issued in anticipation of various seasonal revenues, bond anticipation notes,
and construction loan notes. Short-term municipal bonds may include general
obligation bonds, which are secured by the issuer's pledge of its faith, credit
and taxing power for payment of principal and interest, and revenue bonds, which
are generally paid from the revenues of a particular facility or a specific
excise tax or other source. Examples of taxable investments in which the Fund
may invest include obligations of corporate issuers, U.S. Treasury obligations,
U.S. Government obligations, money market instruments and repurchase agreements.
The Fund may invest more than 25% of its assets in industrial development or
other private activity bonds, subject to the Fund's fundamental investment
policies, and also subject to the Fund's 20% limitation on investing in
securities whose investment income is subject to the alternative minimum tax
("AMT" bonds) and the Fund's current intention not to invest in municipal
securities whose investment income is subject to regular federal income tax. For
purposes of the Fund's investment limitation regarding concentration of
investments in any one industry, industrial development or other private
activity bonds ultimately payable by companies within the same industry will be
considered as if they were issued by issuers in the same industry. The Fund's
distributions from interest on AMT bonds may be taxable depending upon an
investor's particular situation. (For more information please see the Statement
of Additional Information.)
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's assets will normally be invested
in short-term municipal securities.
Under normal market conditions the Fund expects to invest 100% of its portfolio
securities in municipal securities. The Fund may, on a temporary basis, hold and
invest up to 20% of its assets in cash and cash equivalents and in temporary
investments of taxable securities with remaining maturities of 397 calendar days
or less. For temporary defensive purposes the Fund may invest more than 20% in
such investments or may otherwise vary from its investment policies during
periods when the Adviser determines that it is advisable to do so because of
conditions in the securities markets or other economic or political conditions.
It is impossible to accurately predict how long such alternative strategies may
be utilized. In 1997, all the Fund's dividends were 100% federally tax-exempt.
The Fund may also invest in stand-by commitments and other puts, repurchase
agreements, participation interests
--
13
<PAGE>
and when-issued or forward delivery securities. See "Additional information
about policies and investments" for more information about these investment
techniques.
- ---------------------------------------
Scudder Limited Term Tax Free Fund
- ---------------------------------------
Investment objectives and policies
Scudder Limited Term Tax Free Fund, a diversified series of Scudder Tax Free
Trust, seeks to provide as high a level of income exempt from regular federal
income tax as is consistent with a high degree of principal stability. In
pursuing this goal, the Fund maintains a diversified portfolio of shorter-term,
high-grade municipal debt securities with a dollar-weighted average effective
maturity of between one and five years. Within this limitation, the Fund may not
purchase individual securities with effective maturities greater than 10 years
at the time of purchase or issuance, whichever is later. To the extent the Fund
invests in higher-grade securities, it will be unable to avail itself of
opportunities for higher income which may be available with lower-grade
investments.
The Fund's price and yield can fluctuate daily in response to changing bond
market conditions.
Investments
The Fund invests in municipal securities that are debt obligations issued by or
on behalf of states, territories and possessions of the United States, the
District of Columbia and their subdivisions, agencies and instrumentalities, the
interest on which is, in the opinion of bond counsel, exempt from regular
federal income tax. These securities include municipal notes, which are
generally used to provide short-term capital needs and have maturities of one
year or less. Municipal notes include tax anticipation notes, revenue
anticipation notes, bond anticipation notes and construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term capital
needs and generally have maturities of more than one year when issued. Municipal
bonds include general obligation bonds which are secured by the issuer's pledge
of its faith, credit and taxing power for payment of principal and interest,
revenue bonds, industrial development and other private activity bonds.
The Fund purchases securities that it believes are attractive and competitive
values in terms of quality, yield and the relationship of current price to
maturity value. However, recognizing the dynamics of municipal obligation prices
in response to changes in general economic conditions, fiscal and monetary
policies, interest rate levels and market forces such as supply and demand for
various issues, the Adviser, subject to the Trustees' supervision, performs
credit analysis and manages the Fund's portfolio continuously, attempting to
take advantage of opportunities to improve total return, which is a combination
of income and principal performance over the long term.
For federal income tax purposes, the income earned from municipal securities may
be entirely tax-free, taxable or subject to only the alternative minimum tax.
However, the Fund has no current intention of investing in municipal securities
whose interest income is taxable or AMT bonds.
Normally, the Fund invests at least 65% of its net assets in municipal
securities which are rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund will not invest in any debt security rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser. The Fund may, however, invest in a debt security so rated by one rating
agency even though the security may be rated lower by one or more of the other
agencies.
Securities must also meet credit standards applied by the Adviser. Should the
rating of a
- --
14
<PAGE>
portfolio security be downgraded after being purchased by the Fund, the Adviser
will determine whether it is in the best interest of the Fund to retain or
dispose of the security.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's total assets will normally be
invested in municipal securities and, under normal market conditions, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
However, for temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may temporarily invest more than 20% of its assets in taxable
securities during periods which, in the Adviser's opinion, require a defensive
position. A portion of the Fund's income may be subject to regular federal,
state and local income taxes. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in third party puts, municipal lease obligations,
variable rate demand instruments and when-issued or forward delivery securities,
may purchase warrants to purchase debt securities, may enter into repurchase
agreements and may also engage in strategic transactions. See "Additional
information about policies and investments" for more information about these
investment techniques.
- ---------------------------------------
Scudder Medium Term Tax Free Fund
- ---------------------------------------
Investment objectives and policies
Scudder Medium Term Tax Free Fund, a diversified series of Scudder Tax Free
Trust, seeks to provide a high level of income free from regular federal income
taxes and to limit principal fluctuation. The Fund is designed for investors
seeking a higher level of federally tax-free income than normally provided by
tax-free money market or other short-term investments, and more price stability
than investments in long-term municipal bonds.
The Fund will invest primarily in high-grade, intermediate-term municipal bonds.
The dollar-weighted average effective maturity of the Fund's portfolio will
range between five and 10 years. Within this limitation, the Fund may not
purchase individual securities with effective maturities greater than 15 years.
To the extent the Fund invests in high-grade securities, it will be unable to
avail itself of opportunities for higher income which may be available with
lower-grade investments.
Investments
The municipal securities in which the Fund may invest are debt obligations
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax. Such
municipal securities include municipal notes, which are generally used to
provide short-term capital needs and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term capital
needs and generally have maturities of more than one year when issued. Municipal
bonds include general obligation bonds which are secured by the issuer's pledge
of its faith, credit and taxing power for payment of principal and interest,
revenue bonds, prerefunded bonds, industrial development and other private
activity bonds. The Fund may also invest in variable rate demand instruments.
The Fund may invest more than 25% of its assets in industrial development or
other private activity bonds, subject to the Fund's fundamental investment
policies, and also subject to the
--
15
<PAGE>
Fund's current intention not to invest in municipal securities whose investment
income is taxable or AMT bonds. For purposes of the Fund's investment limitation
regarding concentration of investments in any one industry, industrial
development or other private activity, bonds ultimately payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.
Normally, the Fund invests at least 65% of its net assets in municipal bonds
which are rated within the three highest quality rating categories of Moody's
(Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or if
unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund will not invest in any debt security rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser. The Fund may, however, invest in a debt security so rated by one rating
agency even though the security may be rated lower by one or more of the other
agencies.
Securities must also meet credit standards applied by the Adviser. Should the
rating of a portfolio security be downgraded after being purchased by the Fund,
the Adviser will determine whether it is in the best interest of the Fund to
retain or dispose of the security.
At least 80% of the Fund's total assets will normally be invested in municipal
bonds and, under normal market conditions, the Fund expects to invest 100% of
its portfolio securities in municipal securities. However, for temporary
defensive purposes or if an unusual disparity between after-tax income on
taxable and municipal securities makes it advisable, up to 20% of the Fund's
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments. The Fund may
temporarily invest more than 20% of its assets in taxable securities during
periods which, in the Adviser's opinion, require a defensive position. A portion
of the Fund's income may be subject to regular federal, state and local income
taxes. It is impossible to predict how long such alternative strategies may be
utilized.
The Fund may also invest in stand-by commitments and other puts, repurchase
agreements, reverse repurchase agreements, municipal lease obligations, variable
rate demand instruments and when-issued or forward delivery securities, may
purchase warrants to purchase debt securities, and may also engage in strategic
transactions. See "Additional information about policies and investments" for
more information about these investment techniques.
- ---------------------------------------
Scudder Managed Municipal Bonds
- ---------------------------------------
Investment objectives and policies
Scudder Managed Municipal Bonds, a diversified series of Scudder Municipal
Trust, seeks to provide income exempt from regular federal income tax primarily
through investments in high-grade, long-term municipal securities.
The Fund attempts to take advantage of opportunities in the market caused by
such factors as temporary yield disparities among individual issues or classes
of securities in an effort to achieve better capital performance than that of an
unmanaged portfolio of municipal bonds.
All income distributed by the Fund is expected to be exempt from federal income
taxes, but income may be subject to state and local income taxes. Ordinarily,
the Fund expects that 100% of its portfolio securities will be in federally
tax-exempt securities although a small portion of its income may be subject to
regular federal or alternative minimum tax.
Investments
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's net assets will normally be
invested in municipal bonds. Under normal market conditions, the Fund expects to
invest
- --
16
<PAGE>
100% of its portfolio in municipal securities. The Fund has the flexibility to
invest in municipal securities with short-, medium- and long-term maturities.
During recent years, its portfolio has been invested primarily in long-term
municipal bonds.
The municipal securities in which the Fund may invest are issued by or on behalf
of states, territories and possessions of the United States and the District of
Columbia and their subdivisions, agencies and instrumentalities. The interest on
these securities is exempt from regular federal income tax. These municipal
securities include municipal notes, which are generally used to provide
short-term capital needs and have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. The Fund may also invest in
municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued.
Municipal bonds include: general obligation bonds, which are secured by the
issuer's pledge of its faith, credit and taxing power for payment of principal
and interest; revenue bonds; prerefunded bonds; industrial development and
pollution control bonds. The Fund may also invest in other municipal securities
such as variable rate demand instruments.
The Fund may invest more than 25% of its assets in industrial development or
other private activity bonds, subject to the Fund's fundamental investment
policies, and also subject to the Fund's 20% limitation on investing in
municipal securities whose investment income is taxable or AMT bonds and the
Fund's current intention not to invest in municipal securities whose investment
income is subject to regular federal income tax. For purposes of the Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
Normally, the Fund invests at least 65% of its net assets in securities rated,
or issued by an issuer rated, within the three highest quality rating categories
of Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents,
or if unrated, judged by the Adviser, to be of comparable quality at the time of
purchase. The Fund may invest up to 10% of its assets in debt securities rated
lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent quality as
determined by the Adviser, but will not purchase bonds rated below B by Moody's,
S&P or Fitch, or their equivalent. Unrated obligations will be purchased only if
they are considered to be of a quality comparable to obligations rated as
described above and are readily marketable. Securities must also meet credit
standards applied by the Adviser. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security. For
temporary defensive purposes or if an unusual disparity between after-tax income
on taxable and municipal securities makes it advisable, up to 20% of the Fund's
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments. The Fund may
invest more than 20% of its assets in taxable securities to meet temporary
liquidity requirements. It is impossible to predict how long such alternative
strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts, repurchase
agreements, municipal lease obligations, variable rate demand instruments and
when-issued or forward delivery securities, may purchase warrants to purchase
debt securities, and may also engage in strategic transactions. See "Additional
information about policies and investments" for more information about these
investment techniques.
--
17
<PAGE>
- ---------------------------------------
Scudder High Yield Tax Free Fund
- ---------------------------------------
Investment objectives and policies
Scudder High Yield Tax Free Fund, a diversified series of Scudder Municipal
Trust, seeks to provide a high level of income, exempt from regular federal
income tax, from an actively managed portfolio consisting primarily of
investment-grade municipal securities.
The Fund will invest at least 50% of its assets in municipal bonds rated, at the
time of purchase, within the four highest quality rating categories of Moody's
(Aaa, Aa, A or Baa), S&P or Fitch (AAA, AA, A or BBB), or their equivalents as
determined by the Adviser. The Fund may invest, however, up to 50% of its total
assets in bonds rated below Baa by Moody's or below BBB by S&P or Fitch, or
unrated securities considered to be of equivalent quality. The Fund may not
invest in bonds rated below B by Moody's, S&P or Fitch, or their equivalent.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
During the fiscal year ended December 31, 1997, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio was rated as
follows: 18% AAA, 8% AA, 12% A, 36% BBB and 26% not rated or below BBB. The
bonds are rated by Moody's, S&P, or of equivalent quality as determined by the
Adviser. A large portion of the Fund's bond holdings may trade at substantial
discounts from face value.
High quality bonds, those within the two highest quality rating categories,
characteristically have a strong capacity to pay interest and repay principal.
Medium-grade bonds, those within the next two such categories, are defined as
having adequate capacity to pay interest and repay principal. Lower-grade bonds
(so-called "junk bonds"), those rated below Baa by Moody's or BBB by S&P or
Fitch, involve greater price variability and a higher degree of speculation with
respect to the payment of principal and interest. Although some have produced
higher yields in the past than the investment-grade bonds in which the Fund
primarily invests, lower-grade bonds are considered to be predominantly
speculative and, therefore, carry greater risk.
The Fund expects to invest primarily in medium-grade bonds. For temporary
defensive purposes, the Fund may vary from its investment policies during
periods when the Adviser determines that it is advisable to do so because of
conditions in the securities markets or other economic or political conditions.
During such periods the Fund may temporarily invest up to 100% of its assets in
high-quality municipal securities and high-quality short-term tax-exempt or
taxable instruments. It is impossible to accurately predict how long such
alternative strategies may be utilized.
Investments
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's net assets will normally be
invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio assets in municipal securities, the
interest income from which is, in the opinion of bond counsel, free from regular
federal income tax. These municipal securities are debt obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their subdivisions, agencies and instrumentalities.
Such municipal securities include municipal notes, which are generally used to
provide short-term capital needs, and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes and
construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term capital
needs and generally have maturities of more than one year
- --
18
<PAGE>
when issued. Municipal bonds include general obligation bonds, revenue bonds,
prerefunded bonds, industrial development and pollution control bonds. General
obligation bonds and notes are secured by the issuer's pledge of its full faith,
credit and taxing power for payment of principal and interest. Revenue bonds and
notes are generally paid from the revenues of a particular facility or a
specific excise tax or other revenue source. The Fund may also invest in other
municipal securities such as variable rate demand instruments. The Fund may
invest more than 25% of its assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's 20% limitation on investing in AMT bonds and the Fund's
current intention not to invest in municipal securities whose investment income
is subject to regular federal income tax. For purposes of the Fund's investment
limitation regarding concentration of investments in any one industry,
industrial development or other private activity bonds ultimately payable by
companies within the same industry will be considered as if they were issued by
issuers in the same industry.
Under normal market conditions, the Fund expects to invest principally in
municipal securities with long-term maturities (i.e., more than 10 years). The
Fund has the flexibility, however, to invest in municipal securities with short-
and medium-term maturities as well. The Fund may invest more than 20% of its
total assets in taxable securities to meet temporary liquidity requirements.
The Fund may also invest in stand-by commitments and other puts, repurchase
agreements, municipal lease obligations, variable rate demand instruments and
when-issued or forward delivery securities and may also engage in strategic
transactions. See "Additional information about policies and investments" for
more information about these investment techniques.
The Fund's distributions from interest on certain municipal securities may be
subject to the alternative minimum tax depending upon investors' particular
situations. However, no more than 20% of the Fund's net assets will normally be
invested in municipal securities whose interest income, when distributed to
shareholders, is subject to the individual alternative minimum tax. In addition,
state and local taxes may apply, depending on your state tax laws.
- ---------------------------------------
Selecting among the Funds
- ---------------------------------------
The five tax-free Funds discussed in this prospectus have been presented in the
order of their place on the risk/return spectrum--from the least-risk Scudder
Tax Free Money Fund to Scudder High Yield Tax Free Fund, which has the highest
risk but also the highest return potential of the five. Investors should choose
the Fund or Funds that best match their own tolerance for risk and requirements
for tax-free income.
Scudder Tax Free Money Fund can be appropriate for investors looking for income
at today's tax-free money market rates while enjoying stability of principal.
For many investors what is most appealing about this Fund is that it seeks to
maintain its share price at a constant net asset value of $1.00 per share. And
since it pays income that is normally 100% free from regular federal income tax,
investors normally retain the value of their initial investment, tax-free
earnings on that investment, plus earnings on those earnings, if dividends are
reinvested.
Scudder Limited Term Tax Free Fund is designed for investors seeking high
tax-free income consistent with a high degree of price stability. While price
and yield can fluctuate, the Fund may be appropriate for investors needing a
secondary cash reserve, monthly income or a long-term savings vehicle.
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19
<PAGE>
Investors may choose this Fund as an alternative to a tax-free money market
fund. While a tax-free money fund is managed for total price stability, it
generally offers lower and less stable yields than a short-term municipal bond
fund. Further, the Fund may appeal to investors concerned about market
volatility or the possibility of rising interest rates, who are willing to
accept somewhat lower yields than normally provided by a longer-term bond fund
in exchange for greater price stability.
Scudder Medium Term Tax Free Fund is designed for individual and institutional
investors who are looking for higher after-tax income than comparable taxable
investments can provide. The Fund seeks a higher level of income than tax-free
money market instruments normally offer, and greater price stability than is
generally available from longer-term municipal bonds. Over time, the Fund's
share price will fluctuate with changing market conditions. When interest rates
rise, the value of the securities held by this Fund will generally decline. A
fall in interest rates will usually lead to an increase in the value of those
securities. A fund with a maturity longer than Scudder Medium Term Tax Free Fund
will tend to have a higher yield but will exhibit greater share price
volatility; a fund with a shorter maturity will have a lower yield but offers
more price stability.
Scudder Medium Term Tax Free Fund's emphasis on high-grade securities is also
expected to limit credit risk. The Fund's professional managers will attempt to
take advantage of market opportunities to achieve a higher total return than
would be available from an unmanaged portfolio of intermediate-term municipal
bonds.
Scudder Managed Municipal Bonds provides a vehicle for investing in primarily
high-grade long term municipal bonds that are exempt from regular federal income
tax. Investors also benefit from ongoing analysis and professional management by
Scudder Kemper Investments, Inc.
Again, the Fund's professional managers attempt to take advantage of market
opportunities to achieve a higher total return than unmanaged portfolios of
municipal bonds. Typically, the Fund expects to have a higher yield than the
three tax-free funds described above because its portfolio is usually invested
in securities with longer maturities.
With its emphasis on investment-grade bonds, Scudder High Yield Tax Free Fund
offers a sensible approach to high tax-free yields. It is designed for investors
seeking the opportunity for yields higher than those normally offered by a fund
emphasizing investment in only highest-quality bonds, but unwilling to assume
the risk often associated with a fund emphasizing investment primarily in
non-investment-grade bonds. Depending on your tax bracket, you may earn a
substantially higher after-tax return from this Fund than from comparable
investments whose income is subject to federal taxes. For example, if you are a
high income taxpayer with a top federal income tax rate of 39.6% in 1997, you
would need to earn a taxable yield of 7.57% to receive after-tax income equal to
the 4.57% tax-free yield provided by Scudder High Yield Tax Free Fund for the
30-day period ended December 31, 1997.
The yield levels of tax-free and taxable investments continually change. Before
investing in any of these Funds, you should compare their yields to the
after-tax yields you would receive from comparable investments paying taxable
income.
The Adviser maintains a large fixed-income research staff and has a long
tradition of independent municipal bond credit analysis. As of December 31,
1997, the Adviser was responsible for managing more than $200 billion in assets
globally.
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20
<PAGE>
- ---------------------------------------
Additional information about policies
and investments
- ---------------------------------------
Investment restrictions
The Funds have certain investment restrictions which are designed to reduce the
Funds' investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees. A complete listing of
investment restrictions is contained under "Investment Restrictions" in the
Funds' Statement of Additional Information.
As a matter of fundamental policy, the Funds may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Funds may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes, although the Funds may engage up to 5% of
total assets in reverse repurchase agreements or dollar rolls.
As a matter of fundamental policy, the Funds may not make loans except through
the lending of portfolio securities, the purchase of debt securities, interests
in indebtedness or through repurchase agreements. The Funds have adopted a
non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.
A complete listing of investment restrictions is contained under "Investment
Restrictions" in the Funds' Statement of Additional Information.
When-issued securities
Each of the Funds may purchase securities on a when-issued or forward delivery
basis, for payment and delivery at a later date. The price and yield are
generally fixed on the date of commitment to purchase. During the period between
purchase and settlement, no interest accrues to the Fund. At the time of
settlement, the market value of the security may be more or less than the
purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, each of
the Funds may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, the Fund acquires securities,
subject to the seller's agreement to repurchase them at a specified time and
price. Income from repurchase agreements will be taxable when distributed to
shareholders. See "Risk factors."
Illiquid securities
The Funds may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Funds may not be able to dispose of them at an advantageous time
or price. For Scudder Tax Free Money Fund, some restricted securities, however,
may be considered liquid despite resale restrictions, since they can be sold to
other qualified institutional buyers under provisions of the Securities and
Exchange Commission (Rule 144A securities and 4(2) paper). The Trust's Board of
Trustees has delegated to the Adviser the authority to determine those Rule 144A
securities and 4(2) paper that will be considered liquid.
Municipal lease obligations
Each of the Funds, with the exception of Scudder Tax Free Money Fund, may invest
in municipal lease obligations and participation interests in such obligations.
These obligations, which may take the form of a lease, an installment purchase
contract or a conditional sales contract, are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities. Generally, the Funds will not hold such obligations directly, but
will purchase a certificate of participation or other participation interest in
a municipal obligation from a bank or other financial intermediary. A
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21
<PAGE>
participation interest gives each Fund a proportionate interest in the
underlying obligation.
Stand-by commitments and other puts
To facilitate liquidity, each of the Funds, with the exception of Scudder
Limited Term Tax Free Fund, may enter into "stand-by commitments" permitting
them to resell municipal securities to the original seller at a specified price.
Stand-by commitments generally involve no cost, and any costs would be, in any
event, limited to no more than 0.5% of the value of the assets of each Fund. Any
such costs may, however, reduce yield.
Third party puts
Each of the Funds may purchase long-term fixed-rate bonds that have been coupled
with an option granted by a third party financial institution allowing a Fund at
specified intervals (not exceeding 397 calendar days in the case of Scudder Tax
Free Money Fund) to tender (or "put") its bonds to the institution and receive
the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps. See "Risk
factors."
Variable rate demand instruments
Each of the Funds may also invest in variable rate demand instruments. Variable
rate demand instruments are securities with long-stated maturities but demand
features that allow the holder to demand 100% of the principal plus interest
within one to seven days. The coupon varies daily, weekly or monthly with the
market. The price remains at par and this provides a great deal of stability to
the portfolio at market yields.
Tax-exempt custodial receipts
Scudder Managed Municipal Bonds may purchase tax-exempt custodial receipts (the
"Receipts") which evidence ownership in an underlying bond that is deposited
with a custodian for safekeeping. Holders of the Receipts receive all payments
of principal and interest when paid on the bonds. Receipts can be purchased in
an offering or from a financial counterparty (typically an investment banker).
To the extent that any Receipt is illiquid, it is subject to the Fund's limit on
illiquid securities.
Strategic Transactions and derivatives
Each of the Funds, with the exception of Scudder Tax Free Money Fund, may, but
is not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates and broad or
specific market movements), to manage the effective maturity or duration of a
Fund's portfolio, or to enhance potential gain. These strategies may be executed
through the use of derivative contracts. Such strategies are generally accepted
as a part of modern portfolio management and are regularly utilized by many
mutual funds and other institutional investors. Techniques and instruments may
change over time as new instruments and strategies are developed or regulatory
changes occur.
In the course of pursuing these investment strategies, a Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, and enter into various interest
rate transactions such as swaps, caps, floors or collars (collectively, all of
the above are called "Strategic Transactions").
Strategic Transactions may be used without limit (except to the extent that 80%
of a Fund's net assets are required to be invested in tax-exempt municipal
securities, and as limited by its other investment restrictions) to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or
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22
<PAGE>
duration of fixed-income securities in a Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of a Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Funds will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not to create leveraged exposure in the Fund. Please refer to "Risk
factors--Strategic Transactions and derivatives" for more information.
Risk factors
The Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that
certain Funds may use from time to time.
Debt securities. Securities rated Baa by Moody's or BBB by S&P or Fitch are
neither highly protected nor poorly secured. These securities normally pay
higher yields but involve potentially greater price variability than
high-quality securities. These securities are regarded as having adequate
capacity to repay principal and pay interest, although adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to do so. Moody's considers bonds it rates Baa to have speculative
elements as well as investment- grade characteristics.
Debt securities rated below Baa by Moody's or BBB by S&P or Fitch are considered
to be below investment grade. These types of high yield/high risk debt
obligations (commonly referred to as "junk bonds") are predominantly speculative
with respect to the capacity to pay interest and repay principal in accordance
with their terms and generally involve a greater risk of default and more
volatility in price than securities in higher rating categories. These debt
instruments generally offer a higher current yield than that available from
higher grade issues, but typically involve greater risk. Lower rated and unrated
securities are especially subject to adverse changes in general economic
conditions, to changes in the financial condition of their issuers, and to price
fluctuation in response to changes in interest rates. During periods of economic
downturn or rising interest rates, issuers of these instruments may experience
financial stress that could adversely affect their ability to make payments of
principal and interest and increase the possibility of default. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of these securities,
especially in a market characterized by only a small amount of trading.
Perceived credit quality in this market can change suddenly and unexpectedly,
and may not fully reflect the actual risk posed by a particular lower rated or
unrated security.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with
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23
<PAGE>
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.
Illiquid securities. The absence of a trading market can make it difficult to
ascertain a market value for these investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Funds to sell them promptly at an
acceptable price.
Third party puts. In connection with third party puts, the financial institution
granting the option does not provide credit enhancement, and typically if there
is a default on or significant downgrading of the bond or a loss of its
tax-exempt status, the put option will terminate automatically, the risk to the
Fund will be that of holding a long-term bond and, in the case of Scudder Tax
Free Money Fund, the weighted average maturity of the Fund's portfolio would be
adversely affected.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Funds. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property. For more information
please refer to the Funds' Statement of Additional Information.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to a Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation a Fund can
realize on its investments or cause a Fund to hold a security it might otherwise
sell. The use of options and futures transactions entails certain other risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost
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24
<PAGE>
of the initial premium. Losses resulting from the use of Strategic Transactions
would reduce net asset value, and possibly income, and such losses can be
greater than if the Strategic Transactions had not been utilized. The Strategic
Transactions that a Fund may use and some of their risks are described more
fully in the Funds' Statement of Additional Information.
- ---------------------------------------
Distribution and performance
information
- ---------------------------------------
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of a federal excise tax. An additional distribution may
be made if required. Any dividends or capital gains distributions declared in
October, November or December with a record date in such month and paid the
following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared.
According to preference, shareholders may receive distributions in cash or have
them reinvested in additional shares of a Fund.
Distributions of tax-exempt income are not subject to federal income taxes,
except for the possible applicability of the alternative minimum tax. However,
distributions may be subject to state and local income taxes. A portion of each
Fund's income, including income from repurchase agreements, gains from options,
and market discount bonds, may be taxable to shareholders as ordinary income.
Long-term capital gains distributions, if any, are taxable to individual
shareholders at a maximum 20% or 28% capital gains rate (depending on the Fund's
holding period for the assets giving rise to the gain), regardless of the length
of time shareholders have owned shares. Short-term capital gains and any other
taxable income distributions are taxable as ordinary income. Distributions of
tax-exempt income are taken into consideration in computing the portion, if any,
of Social Security and railroad retirement benefits subject to federal and, in
some cases, state taxes.
Each Fund sends detailed tax information about the amount and type of its
distributions to its shareholders by January 31 of the following year.
Performance information
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. For Scudder Tax Free Money Fund, the
"yield" of a Fund refers to income generated by an investment in the Fund over a
specified seven-day period. The "SEC yield" of Scudder Limited Term Tax Free
Fund, Scudder Medium Term Tax Free Fund, Scudder Managed Municipal Bonds and
Scudder High Yield Tax Free Fund is an annualized expression of the net income
generated by a Fund over a specified 30-day (one month) period, as a percentage
of a Fund's share price on the last day of that period. This yield is calculated
according to methods required by the Securities and Exchange Commission (the
"SEC"), and therefore may not equate to the level of income paid to
shareholders. The "effective yield" of a Fund is expressed similarly but, when
annualized, the income earned by an investment in a Fund is assumed to be
reinvested and will reflect the effects of compounding. A Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of a
Fund's yield, assuming certain tax brackets for a Fund shareholder. "Total
return" is the change in value of an investment in a Fund for a specified
period. The "average annual total return" of a Fund is
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25
<PAGE>
the average annual compound rate of return of an investment in a Fund assuming
the investment has been held for one year, five years and ten years or life of a
Fund as of a stated ending date. "Cumulative total return" represents the
cumulative change in value of an investment in a Fund for various periods. All
types of total return calculations assume that all dividends and capital gains
distributions during the period were reinvested in shares of a Fund. Performance
will vary based upon, among other things, changes in market conditions and the
level of a Fund's expenses.
- ---------------------------------------
Fund organization
- ---------------------------------------
Scudder Tax Free Money Fund, Scudder Tax Free Trust and Scudder Municipal Trust
(the "Trusts") are open-end management investment companies registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trusts were organized as
Massachusetts business trusts in October 1979, December 1982 and September 1976,
respectively. Scudder Limited Term Tax Free Fund and Scudder Medium Term Tax
Free Fund are diversified series of Scudder Tax Free Trust. Scudder High Yield
Tax Free Fund and Scudder Managed Municipal Bonds are diversified series of
Scudder Municipal Trust.
The activities of the Funds are supervised by their respective Boards of
Trustees. Shareholders have one vote for each share held on matters on which
they are entitled to vote. The Trusts are not required and have no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment advisory contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
The prospectuses of each of the five Funds are combined in this prospectus. Each
Fund offers only its own shares, yet it is possible that a Fund might become
liable for a misstatement or omission regarding another Fund. The Trustees of
each Trust have considered this and approved the use of a combined prospectus.
Investment adviser
The Funds retain the investment management firm of Scudder Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.,
to manage each Fund's daily investment and business affairs subject to the
policies established by the relevant Trust's Board of Trustees. The Trustees
have overall responsibility for the management of their respective Funds under
Massachusetts law.
Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
The management fee for Scudder Limited Term Tax Free Fund is 0.60% of the Fund's
average daily net assets of the Fund.
The management fees for Scudder Tax Free Money Fund, Scudder Medium Term Tax
Free Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund
are graduated so that increases in a Fund's net assets may result in a lower fee
and decreases in a Fund's net assets may result in a higher fee.
The management fees are payable monthly, provided that each Fund will make such
interim payments as may be requested by the Adviser not
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26
<PAGE>
to exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid.
Until February 28, 1999, the Adviser has agreed not to impose all or a portion
of its investment management fee and to take other action, to the extent
necessary, to maintain the annualized expenses of Scudder Limited Term Tax Free
Fund at 0.75% of the Fund's average daily net assets.
Until April 30, 1998, the Adviser has agreed not to impose a portion of its
investment management fee and to take other action, to the extent necessary, to
maintain the annualized expenses of Scudder Tax Free Money Fund at 0.65% of the
Fund's average daily net assets.
For the fiscal year ended December 31, 1997, the Adviser received investment
management fees of 0.39%, 0.51%, 0.58% and 0.67% of each Fund's average daily
net assets on an annualized basis for Scudder Tax Free Money Fund, Scudder
Managed Municipal Bonds, Scudder Medium Term Tax Free Fund and Scudder High
Yield Tax Free Fund, respectively.
For the fiscal year ended October 31, 1997, the Adviser received an investment
management fee of 0.52% of the average daily net assets on an annualized basis
from Scudder Limited Term Tax Free Fund.
All of the Funds' expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment or administrative services.
Scudder Kemper Investments, Inc. is located at
Two International Place, Boston, Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for each Fund.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is each Fund's
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Funds. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of each Fund.
Custodian
State Street Bank and Trust Company is the custodian for each Fund.
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27
<PAGE>
- ---------------------------------------
Summary of important features
- ---------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Scudder Scudder Scudder Scudder Scudder
Tax Free Money Limited Term Medium Term Managed Municipal High Yield
Fund Tax Free Fund Tax Free Fund Bonds Tax Free Fund
<S> <C> <C> <C> <C> <C>
Investment o money market o higher and more o higher o income exempt o high tax-free
characteristics fund income stable level of tax-free from regular income
exempt from federally income than federal income
regular federal tax-free income generally tax
income tax than normally available from
provided by tax-free money
tax-free money market funds
market
investments
o stability of o more price o more price o net asset value o potentially
principal stability than stability than fluctuates with greater price
investments in investments in level of variability
long-term long-term interest rates
municipal bonds municipal bonds
Investments o short-term o shorter-term o intermediate- o primarily o primarily
municipal municipal term municipal long-term long-term
securities securities securities municipal municipal
securities securities
o dollar-weighted o dollar-weighted o dollar-weighted
average average average
maturity of 90 effective effective
days or less maturity of maturity of
between one and between five
five years
and ten years
Quality o 100% of o normally at o normally at o at least 65% of o at least 50% of
investments least 65% of least 65% of investments investments
rated within investments investments rated within rated within top
top two quality rated within rated within top three four quality
rating top three top three quality rating rating
categories, or quality rating quality rating categories, or categories, or
judged to be of categories, or categories, or equivalent equivalent
comparable equivalent equivalent
quality
</TABLE>
Dividends Dividends for all five funds are declared daily and paid
monthly. Shareholders may choose to reinvest their
dividends or receive them in cash.
- --------------------------------------------------------------------------------
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28
<PAGE>
- ---------------------------------------
Transaction information
- ---------------------------------------
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
each Fund's transfer agent receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay.
Redemption requests by telephone, or by "Write-A-Check" in the case of Scudder
Tax Free Money Fund, Scudder Limited Term Tax Free Fund and Scudder Medium Term
Tax Free Fund, prior to the expiration of the seven-day period will not be
accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By "QuickBuy." If you elected "QuickBuy" for your account, you can call
toll-free to purchase shares. The money will be automatically transferred from
your predesignated bank checking account. Your bank must be a member of the
Automated Clearing House for you to use this service. If you did not elect
"QuickBuy," call 1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.
If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.
By exchange. Each Fund may be exchanged for shares of other funds in the Scudder
Family of Funds unless otherwise determined by each Fund's Board of Trustees.
Your new account will have the same registration and address as your existing
account.
--
29
<PAGE>
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares unaccompanied by payment prior to the close of
regular trading on the New York Stock Exchange (the "Exchange"), normally 4:00
p.m. eastern time, and receive that day's price. Please call 1-800-854-8525 for
more information, including the dividend treatment and method and manner of
payment for Fund shares.
Redeeming shares
The Funds allow you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "QuickSell." If you elected "QuickSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "QuickSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
By "Write-A-Check." You may redeem shares of Scudder Tax Free Money Fund,
Scudder Limited Term Tax Free Fund and Scudder Medium Term Tax Free Fund by
writing checks against your account balance for at least $100. Your Fund
investments will continue to earn dividends until your check is presented to the
Fund for payment. Checks will be returned by the Fund's transfer agent if there
are insufficient shares to meet the withdrawal amount. You should not attempt to
close an account by check, because the exact balance at the time the check
clears will not be known when the check is written.
- --
30
<PAGE>
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $100,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (Each Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $100,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. Each Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value. For
each of the Funds, Scudder Fund Accounting Corporation determines net asset
value per share as of the close of regular trading on the Exchange on each day
the Exchange is open for trading. For Scudder Tax Free Money Fund, Scudder Fund
Accounting Corporation also determines net asset value per share as of noon,
eastern time, on each day the Exchange is open for trading. Net asset value per
share is calculated for purchases and redemptions by dividing the value of total
Fund assets, less all liabilities, by the total number of shares outstanding. In
calculating the net asset value per share, each Fund uses the current market
value of the securities, except that Scudder Tax Free Money Fund uses the
amortized cost value.
Processing time
For Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free Fund,
Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund all
purchase and redemption requests must be received in good order by the Funds'
transfer agent. Requests received by the close of regular trading on the
Exchange are executed at the net asset value per share calculated at the close
of trading that day. Purchase and redemption requests received after the close
of regular trading on the Exchange will be executed the following business day.
Purchases made by federal funds wire before noon eastern time will begin earning
income that day; all other purchases received before the close of regular
trading on the Exchange will begin earning income the next business day.
Redeemed shares will earn income on the day on which the redemption request is
executed.
If you wish to make a purchase of $500,000 or more you should notify the Funds'
transfer agent of such a purchase by calling 1-800-225-5163.
For Scudder Tax Free Money Fund, purchases made by wire and received by the
Fund's transfer agent before noon on any business day are executed at noon on
that day and begin earning income the same day. Those made by wire between noon
and the close of regular trading on the Exchange on any business day are
executed at the close of trading the same day and begin earning income the next
business day. Purchases made by check are executed on the day the check is
received in good order by the Fund's transfer agent and begin earning income on
the next business day. Redemption requests received in good order by the Fund's
transfer agent between noon and the close of regular trading on the Exchange are
executed at
--
31
<PAGE>
the net asset value calculated at the close of regular trading on that day and
will earn a dividend on the redeemed shares that day. If a redemption request is
received by noon, proceeds will normally be wired that day, if requested by the
shareholder, but no dividend will be earned on the redeemed shares on that day.
The Funds will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
For Scudder Medium Term Tax Free Fund, Scudder Managed Municipal Bonds and
Scudder High Yield Tax Free Fund purchases and sales should be made for
long-term investment purposes only. All Funds and Scudder Investor Services,
Inc. reserve the right to reject purchases of Fund shares (including exchanges)
for any reason including when a pattern of frequent purchases and sales made in
response to short-term fluctuations in each Fund's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes
(although no gain or loss will be realized in the case of a redemption or
exchange of shares of Scudder Tax Free Money Fund if it maintains a constant net
asset value per share).
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires these Funds to
withhold 31% of taxable dividends, capital gains distributions and, except in
the case of Scudder Tax Free Money Fund, redemption and exchange proceeds from
accounts (other than those of certain exempt payees) without a correct certified
Social Security or tax identification number and certain other certified
information or upon notification from the IRS or a broker that withholding is
required. The Funds reserve the right to reject new account applications without
a correct certified Social Security or tax identification number. The Funds also
reserve the right, following 30 days' notice to shareholders, to redeem all
shares in accounts without a correct certified Social Security or tax
identification number. A shareholder may avoid involuntary redemption by
providing the Fund with a tax identification number during the 30-day notice
period.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500, which amount
may be changed by the Board of Trustees of each Trust. Scudder retirement plans
and certain other accounts have similar or lower minimum share balance
requirements. A shareholder may open an account with at least $1,000, if an
automatic investment plan of $100/month is established.
Shareholders who maintain a non-fiduciary account balance of less than $2,500 in
a Fund, without establishing an automatic investment plan, will be assessed an
annual $10.00 per fund charge with the fee to be paid to the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. Each Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. Each Fund
will mail the proceeds of the redeemed account to the shareholder.
- --
32
<PAGE>
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. Retirement accounts and certain other accounts will not
be assessed the $10.00 charge or be subject to automatic liquidation. Please
refer to "Exchanges and Redemptions--Other information" in the Funds' Statement
of Additional Information for more information.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
- ---------------------------------------
Shareholder benefits
- ---------------------------------------
Experienced professional management
Scudder Kemper Investments, Inc., one of the nation's most experienced
investment management firms, actively manages your Scudder fund investment.
Professional management is an important advantage for investors who do not have
the time or expertise to invest directly in individual securities.
A team approach to investing
Each of the Funds is managed by a team of investment professionals who each play
an important role in the Fund's management process. Team members work together
to develop investment strategies and select securities for the Fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits Fund investors by bringing together many disciplines and
leveraging its extensive resources.
M. Ashton Patton has been Lead Portfolio Manager for Scudder Limited Term Tax
Free Fund since 1994, for Scudder Medium Term Tax Free Fund since 1998, and for
Scudder Managed Municipal Bonds since 1998. Ms. Patton joined the Adviser in
1990 and has been a portfolio manager since 1990.
Philip Condon, Lead Portfolio Manager for Scudder High Yield Tax Free Fund since
its inception in 1987 and for Scudder Managed Municipal Bonds since 1998, has
been a portfolio manager since 1987. Mr. Condon joined the Adviser in 1983 and
also serves as Portfolio Manager for Scudder Medium Term Tax Free Fund.
Frank J. Rachwalski, Lead Portfolio Manager for Scudder Tax Free Money Fund,
joined the Adviser in 1973 and has over 20 years experience in short-term fixed
income investing and research. Mr. Rachwalski assumed responsibility for the
Fund's investment strategy and operations in 1998.
Jerri Cohen, Portfolio Manager for Scudder Tax Free Money Fund since 1998,
joined the Adviser in 1981 and has over 15 years' experience in tax-exempt money
market fund investing.
K. Sue Cote, Portfolio Manager for Scudder Limited Term Tax Free Fund since
1998, joined the Adviser in 1983 as a research assistant and has been a
portfolio manager since 1986.
Rebecca L. Wilson joined the Adviser in 1986 and the team of Scudder High Yield
Tax Free Fund as a Portfolio Manager in 1998. Ms. Wilson contributes over 11
years of experience in municipal investing and research.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such
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33
<PAGE>
an event you should write to the Fund; please see "How to contact Scudder" for
the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) Telephone and fax redemptions and
exchanges are subject to termination and their terms are subject to change at
any time by the Fund or the transfer agent. In some cases, the transfer agent or
Scudder Investor Services, Inc. may impose additional conditions on telephone
transactions.
Personal Counsel(SM) -- A Managed Fund Portfolio Program
If you would like to receive direct guidance and management of your overall
mutual fund portfolio to help you pursue your investment goals, you may be
interested in Personal Counsel from Scudder. Personal Counsel, a program of
Scudder Investor Services, Inc., a registered investment adviser and a
subsidiary of Scudder Kemper Investments, Inc., combines the benefits of a
customized portfolio of pure no-load Scudder Funds with ongoing portfolio
monitoring and individualized service, for an annual fee of generally 1% or less
of assets (with a $1,000 minimum). In addition, it draws upon the Adviser's more
than 75-year heritage of providing investment counsel to large corporate and
private clients. If you have $100,000 or more to invest initially and would like
more information about Personal Counsel, please call 1-800-700-0183.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Investor Centers
As a convenience to shareholders who like to conduct business in person,
Scudder Investor Services, Inc. maintains Investor Centers in Boca Raton,
Boston, Chicago, New York and San Francisco.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
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34
<PAGE>
- ---------------------------------------
Purchases
- ---------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
<S> <C> <C>
Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds." by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
Then call 1-800-225-5163 for instructions.
o In Person Visit one of our Investor Centers to complete your application with the
help of a Scudder representative. Investor Center locations are listed
under Shareholder benefits.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
shares See appropriate plan literature.
<S> <C> <C>
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the
Scudder Funds." complete Fund name, to the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
o In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By QuickBuy or By telephone order for more details.
o By Automatic You may arrange to make investments on aregular basis regular basis
Investment Plan through automatic deductions from your bank checking
($50 minimum) account. Please call 1-800-225-5163 for more information and an
enrollment form.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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35
<PAGE>
- ---------------------------------------
Exchanges and redemptions
- ---------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts
<S> <C> <C>
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291
- ------------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may
have redemption proceeds sent to your predesignated bank account, or
redemption proceeds of up to $100,000 sent to your address of record.
o By "Write- You may redeem shares of Scudder Tax Free Money Fund, Scudder Limited Term Tax Free
A-Check" Fund and Scudder Medium Term Tax Free Fund by writing checks against your account
balance as often as you like for at least $100, but not more than $5,000,000.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $100,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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36
- ---------------------------------------
Scudder tax-advantaged
retirement plans
- ---------------------------------------
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
o Scudder No-Fee IRA
o Scudder Roth No-Fee IRA
o Keogh Plans
o 401(k) Plans
o Profit Sharing and Money Purchase Pension Plans
o 403(b) Plans
o SEP-IRA
o Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA and most Profit
Sharing or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
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37
<PAGE>
- ---------------------------------------
Appendix
- ---------------------------------------
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A, Baa, Ba
and B. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
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. Together
with securities rated A and Baa, they comprise investment grade securities.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have speculative elements as well as investment grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade.
Moody's judges municipal bonds rated Ba to have speculative elements, with very
moderate protection of interest and principal payments and thereby not well
safeguarded under any future conditions. Municipal bonds rated B by Moody's
generally lack characteristics of desirable investments. Long-term assurance of
the contract terms of B-rated municipal bonds, such as interest and principal
payments, may be small. Securities rated Ba or below are commonly referred to as
"junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA (High
grade), A (Good grade), BBB (Investment grade), BB (Below investment grade) and
B. Bonds rated AAA have the highest rating assigned by S&P to a municipal
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in a small degree. Bonds rated A
have a strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions. Bonds rated BBB have an adequate capacity to pay interest and to
repay principal. Adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds of this category than for bonds of higher rated categories. Securities
rated BB or below by S&P are considered below investment grade. Debt rated BB by
S&P faces major ongoing uncertainties or exposure to adverse conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. Municipal bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Securities rated BB or below are commonly referred to as "junk" bonds and as
such they carry a high margin of risk.
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38
<PAGE>
S&P's top ratings for municipal notes are SP-1 and SP-2. The designation SP-1
indicates a very strong capacity to pay principal and interest. A "+" is added
for those issues determined to possess overwhelming safety characteristics. An
SP-2 designation indicates a satisfactory capacity to pay principal and
interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A, BBB, BB and
B. Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+. Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings. Securities
rated BB or below by Fitch are considered below investment grade. Fitch
considers bonds rated BB to be speculative because the issuer's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, although financial alternatives can be identified to assist the issuer
in meeting its obligations. While bonds rated B are currently meeting debt
service requirements, they are considered highly speculative in light of the
issuer's limited margin of safety. Securities rated BB or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
--
39
<PAGE>
- --------------------------------------------------------------------------------
Trustees and Officers
- --------------------------------------------------------------------------------
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern University
College of Business Administration
Kathryn L. Quirk*
Vice President; Trustee and Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President (1)
K. Sue Cote*
Vice President (2)
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
M. Ashton Patton*
Vice President (3)
Thomas F. McDonough*
Vice President, Secretary and Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
(1) Scudder Municipal Trust
(2) Scudder Tax Free Money Fund
(3) Scudder Tax Free Trust
All funds unless otherwise indicated.
* Scudder Kemper Investments, Inc.
- --
40
<PAGE>
- --------------------------------------------------------------------------------
Investment products and services
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--Managed Shares*
Tax Free Money Market+
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited
Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
U.S. Growth
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Education Accounts
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. +++ +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered
by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various foreign stock exchanges.
--
41
<PAGE>
- --------------------------------------------------------------------------------
How to contact Scudder
- --------------------------------------------------------------------------------
Account Service and Information:
For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163
For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you
Scudder Electronic Account Services -- http://funds.scudder.com
For personalized information about your Scudder accounts, exchanges and
redemptions
Scudder Automated Information Line (SAIL) -- 1-800-343-2890
Investment Information:
For information about the Scudder funds, including additional applications
and prospectuses, or for answers to investment questions
Scudder Investor Relations -- 1-800-225-2470
[email protected]
Scudder's World Wide Web Site -- http://funds.scudder.com
For establishing 401(k) and 403(b) plans
Scudder Defined Contribution Services -- 1-800-323-6105
Scudder Brokerage Services:
To receive information about this discount brokerage service and to obtain
an application
Scudder Brokerage Services* -- 1-800-700-0820
Personal Counsel(SM) -- A Managed Fund Portfolio Program:
To receive information about this mutual fund portfolio guidance and
management program
Personal Counsel from Scudder -- 1-800-700-0183
Please address all correspondence to:
The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291
Or Stop by a Scudder Investor Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be found
in the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061 --
Member NASD/SIPC.
<PAGE>
SCUDDER TAX FREE MONEY FUND
(A Pure No-Load(TM) Diversified Investment Company Specializing
in the Management of a Portfolio of High-Quality, Short-Term Securities
Exempt from Federal Income Taxes Which Seeks to Maintain
a Constant Net Asset Value of $1.00 Per Share)
and
SCUDDER LIMITED TERM TAX FREE FUND
(A Series of a Pure No-Load(TM) (No Sales Charges) Diversified
Investment Company Which Seeks to Provide as High a Level of Income Exempt
From Regular Federal Income Tax as is Consistent
With a High Degree of Principal Stability)
and
SCUDDER MEDIUM TERM TAX FREE FUND
(A Series of a Pure No-Load(TM) Diversified Investment Company Specializing
in the Management of a Portfolio Primarily of High-Grade,
Intermediate-Term Municipal Securities Exempt
From Federal Income Taxes, with an Emphasis on
Limited Principal Fluctuation)
and
SCUDDER MANAGED MUNICIPAL BONDS
(A Series of a Pure No-Load(TM) Diversified Investment Company
Specializing in the Management of a Portfolio of
Primarily High-Grade, Long-Term
Municipal Securities)
and
SCUDDER HIGH YIELD TAX FREE FUND
(A Series of a Pure No-Load(TM) Diversified Investment Company
Specializing in the Management of a Municipal Bond
Portfolio of Primarily Investment-
Grade Municipal Securities)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1998
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus and
should be read in conjunction with the combined prospectus of Scudder Tax Free
Money Fund, Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free
Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund,
dated March 1, 1998, as amended from time to time, copies of which may be
obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
Page
TABLE OF CONTENTS
THE FUNDS AND THEIR OBJECTIVES.................................................1
General Investment Objectives and Policies of Scudder Tax Free Money
Fund..................................................................1
General Investment Objective and Policies of Scudder Limited Term
Tax Free Fund.........................................................3
General Investment Objectives and Policies of Scudder Medium Term
Tax Free Fund.........................................................5
General Investment Objective and Policies of Scudder Managed
Municipal Bonds.......................................................6
General Investment Objective and Policies of Scudder High Yield Tax
Free Fund.............................................................8
Risk Factors............................................................10
Master/feeder Structure.................................................11
Investments and Investment Techniques Common to the Funds...............11
Trustees' Power to Change Objectives and Policies.......................23
Investment Restrictions.................................................23
PURCHASES.....................................................................33
Additional Information About Opening an Account.........................33
Checks..................................................................33
Wire Transfer of Federal Funds..........................................34
Additional Information About Making Subsequent Investments by
QuickBuy.............................................................34
Share Price.............................................................35
Share Certificates......................................................35
Other Information.......................................................35
EXCHANGES AND REDEMPTIONS.....................................................35
Exchanges...............................................................35
Redemption by Telephone.................................................36
Redemption By QuickSell.................................................37
Redemption by Mail or Fax...............................................38
Redemption by Write-A-Check.............................................38
Other Information.......................................................38
FEATURES AND SERVICES OFFERED BY THE FUNDS....................................39
The Pure No-Load(TM) Concept............................................39
Internet Access.........................................................40
Dividend and Capital Gain Distribution Options..........................41
Scudder Investor Centers................................................41
Reports to Shareholders.................................................41
Diversification.........................................................41
Transaction Summaries...................................................41
THE SCUDDER FAMILY OF FUNDS...................................................41
SPECIAL PLAN ACCOUNTS.........................................................46
Automatic Withdrawal Plan...............................................46
Cash Management System - Group Sub-Accounting Plan for Trust
Accounts, Nominees and Corporations..................................47
Automatic Investment Plan...............................................47
Uniform Transfers/Gifts to Minors Act...................................48
DIVIDENDS.....................................................................48
Scudder Tax Free Money Fund.............................................48
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free
Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax
Free Fund............................................................49
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION.......................................................49
Scudder Tax Free Money Fund.............................................49
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free
Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax
Free Fund............................................................50
Tax-Exempt Income vs. Taxable Income....................................53
Comparison of Fund Performance..........................................54
ORGANIZATION OF THE FUNDS.....................................................58
INVESTMENT ADVISER............................................................59
Personal Investments by Employees of the Adviser........................63
TRUSTEES AND OFFICERS.........................................................63
REMUNERATION..................................................................66
Responsibilities of the Board--Board and Committee Meetings.............66
Compensation of Officers and Trustees...................................67
DISTRIBUTOR...................................................................68
TAXES.........................................................................69
PORTFOLIO TRANSACTIONS........................................................72
Brokerage...............................................................72
Portfolio Turnover......................................................73
NET ASSET VALUE...............................................................74
Scudder Tax Free Money Fund.............................................74
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free
Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax
Free Fund............................................................74
ADDITIONAL INFORMATION........................................................75
Experts.................................................................75
Shareholder Indemnification.............................................75
Ratings of Municipal Obligations........................................75
Commercial Paper Ratings................................................76
Glossary................................................................77
FINANCIAL STATEMENTS..........................................................80
Scudder Tax Free Money Fund.............................................80
Scudder Limited Term Tax Free Fund......................................80
Scudder Medium Term Tax Free Fund.......................................80
Scudder Managed Municipal Bonds.........................................80
Scudder High Yield Tax Free Fund........................................80
i
<PAGE>
THE FUNDS AND THEIR OBJECTIVES
(See "Scudder Tax Free Money Fund --
Investment objectives and policies" and "Investments,"
"Scudder Limited Term Tax Free Fund --
Investment objectives and policies," and "Investments"
"Scudder Medium Term Tax Free Fund --
Investment objectives and policies," and "Investments,"
"Scudder Managed Municipal Bonds --
Investment objectives and policies" and "Investments,"
"Scudder High Yield Tax Free Fund --
Investment objectives and policies" and "Investments,"
and "Additional information
about policies and investments"
in the Funds' prospectus.)
Scudder Tax Free Money Fund sometimes is referred to herein as "STFMF."
Scudder Tax Free Trust, the Massachusetts business trust of which Scudder
Limited Term Tax Free Fund and Scudder Medium Term Tax Free Fund are series, is
referred to herein as "STFT." Scudder Limited Term Tax Free Fund, a series of
STFT, sometimes is referred to herein as "SLTTFF." Scudder Medium Term Tax Free
Fund, a series of STFT, sometimes is referred to herein as "SMTTFF." Scudder
Municipal Trust, the Massachusetts business trust of which Scudder Managed
Municipal Bonds and Scudder High Yield Tax Free Fund are series, is referred to
herein as "SMT." Scudder Managed Municipal Bonds, a series of SMT, sometimes is
referred to herein as "SMMB." Scudder High Yield Tax Free Fund, a series of SMT,
is sometimes referred to herein as "SHYTFF." STFMF, SLTTFF, SMTTFF, SMMB and
SHYTFF sometimes are referred to individually as a "Fund" and jointly as "the
Funds."
General Investment Objectives and Policies of Scudder Tax Free Money Fund
Scudder Tax Free Money Fund is a pure no-load(TM) open-end diversified
investment company. The investment objectives of STFMF are to provide to its
shareholders income exempt from regular federal income tax while seeking
stability of principal. STFMF pursues these objectives through the professional
management of a high quality portfolio consisting primarily of municipal
securities (as defined below under "Investments and Investment Techniques Common
to the Funds--Municipal Securities") having remaining maturities of 397 days or
less with a dollar-weighted average portfolio maturity of 90 days or less. STFMF
seeks to maintain a constant net asset value of $1.00 per share, although in
certain circumstances this may not be possible. Unless otherwise specified, the
investment objectives and policies of STFMF can be changed by the Trustees
without a vote of a majority of the Fund's outstanding voting securities. There
can be no assurance that STFMF's objectives will be achieved or that income to
shareholders which is exempt from federal income tax will be exempt from state
and local taxes. No more than 20% of STFMF's net assets will normally be
invested in municipal securities whose interest income is subject to the
individual alternative minimum tax.
STFMF's Investments. All of STFMF's assets will consist of municipal securities,
temporary investments in taxable securities as described below, and cash. STFMF
will invest in municipal securities which are rated at the time of purchase by
Moody's Investor Services, Inc. ("Moody's") within its two highest ratings for
municipal obligations--Aaa and Aa, or within Moody's short-term municipal
obligations top ratings of MIG 1 and MIG 2 and P1 and P2, are rated at the time
of purchase by Standard & Poor's Corporation ("S&P") within S&P's two highest
ratings for municipal obligations--AAA/AA or within S&P's short term municipal
ratings of SP-1+ and SP-1 and A1+, A1 and A2 --or are rated at the time of
purchase by Fitch Investors Service, Inc. ("Fitch") within Fitch's two highest
ratings for municipal obligations-AAA and AA or within Fitch's highest short
term rating of F-1 and F-2, all in such proportions as management will
determine. The Fund also may invest in securities rated within the two highest
ratings by only one of those rating agencies if no other rating agency has rated
the security. In some cases, short-term municipal obligations are rated using
the same categories as are used for corporate obligations. For a description of
ratings for municipal and corporate obligations, see "ADDITIONAL
INFORMATION--Ratings of Municipal and Corporate Bonds, Commercial Paper
Ratings." In addition, unrated municipal securities will be considered as being
within the foregoing quality ratings if the issuer, or other equal or junior
municipal securities of the same issuer, has a rating within the foregoing
ratings of Moody's, S&P or Fitch. STFMF may also invest in municipal securities
which are unrated if, in the opinion of Scudder Kemper Investments, Inc. (the
"Adviser"), such securities possess creditworthiness comparable to those rated
securities in which STFMF may invest.
<PAGE>
Subsequent to its purchase by STFMF, an issue of municipal securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by STFMF. The Adviser will dispose of any such security unless the
Board of Trustees of the Fund determines that such disposal would not be in the
best interests of the Fund. To the extent that the ratings accorded by Moody's,
S&P or Fitch for municipal securities may change as a result of changes in these
rating systems, STFMF will attempt to use comparable ratings as standards for
its investment in municipal securities in accordance with the investment
policies contained herein.
From time to time on a temporary basis or for defensive purposes, STFMF
may, subject to its investment restrictions, hold cash and invest temporarily in
taxable investments which mature in one year or less at the time of purchase,
consisting of (1) other obligations issued by or on behalf of municipal or
corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3) obligations of
agencies and instrumentalities of the U.S. Government; (4) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and banker's acceptances; and (5) repurchase
agreements (agreements under which the seller agrees at the time of sale to
repurchase the security at an agreed time and price) with respect to any of the
obligations which the Fund is permitted to purchase. STFMF will not invest in
instruments issued by banks or savings and loan associations unless at the time
of investment such issuers have total assets in excess of $1 billion (as of the
date of their most recently published annual financial statements). Commercial
paper investments will be limited to commercial paper rated A1+, A1 and A2 by
S&P, Prime 1 by Moody's or F-1 and F-2 by Fitch. STFMF may hold cash or invest
temporarily in taxable investments due, for example, to market conditions or
pending investment of proceeds of subscriptions for shares of STFMF or proceeds
from the sale of portfolio securities or in anticipation of redemptions.
However, STFMF expects to invest such proceeds in municipal securities as soon
as practicable. Interest income from temporary investments may be taxable to
shareholders as ordinary income.
STFMF may acquire other types of securities, such as common and preferred
stocks and corporate bonds, in connection with the merger or consolidation with,
or acquisition of the assets of, another investment company or personal holding
company. In no case will STFMF acquire them if more than 20% of the Fund's total
assets would consist of such securities, cash and temporary taxable investments.
STFMF would issue its shares at net asset value in connection with such a
merger, consolidation or acquisition.
Maintenance of Constant Net Asset Value. Pursuant to a rule of the Securities
and Exchange Commission (the "SEC") STFMF uses the amortized cost method of
valuing its investments, which facilitates the maintenance of the Fund's per
share net asset value at $1.00. The amortized cost method, which is used to
value all of STFMF's portfolio securities, involves initially valuing a security
at its cost and thereafter amortizing to maturity any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument.
Consistent with the provisions of the Rule, STFMF maintains a
dollar-weighted average portfolio maturity of 90 days or less, purchases only
instruments having remaining maturities of 397 days or less, and invests only in
securities determined by or under the direction of the Trustees to be of high
quality with minimal credit risks.
The Trustees have also established procedures designed to stabilize, to
the extent reasonably possible, STFMF's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
STFMF's portfolio by the Trustees, at such intervals as they deem appropriate,
to determine whether the Fund's net asset value calculated by using available
market quotations or market equivalents (the determination of value by reference
to interest rate levels, quotations of comparable securities and other factors)
deviates from $1.00 per share based on amortized cost. Market quotations and
market equivalents used in such review may be obtained from an independent
pricing service approved by the Trustees.
The extent of deviation between STFMF's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or in other unfair results to investors or
existing shareholders, they will take such corrective action as they regard to
be necessary and appropriate, including the sale of portfolio instruments prior
to maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00 the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro-rata basis, and (2) to offset each shareholder's pro-rata
portion of the deviation between the net asset value per share and $1.00 from
the shareholder's accrued dividend account or from future dividends. STFMF may
hold cash for the purpose of stabilizing its net asset value per share. Holdings
of cash, on which no return is earned, would tend to lower the yield on STFMF's
shares.
<PAGE>
Special Considerations. Yields on municipal securities depend on a variety of
factors, including money market conditions, municipal bond market conditions,
the size of a particular offering, the maturity of the obligation and the
quality of the issue. Municipal securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their Municipal securities may be materially affected. Shares of STFMF
are not insured by any agency of the U.S. Government. The Fund also practices
other investment strategies that may involve additional risk. (See "Investments
and Investment Techniques Common to the Funds.")
General Investment Objective and Policies of Scudder Limited Term Tax Free Fund
Scudder Limited Term Tax Free Fund, a series of Scudder Tax Free Trust, is
a pure no-load(TM), open-end diversified mutual fund designed for investors
seeking a higher level of federally tax-free income than normally provided by
tax-free money market investments; and more price stability than investments in
long-term municipal bonds.
The Fund's investment objective is to provide as high a level of income
exempt from regular federal income tax as is consistent with a high degree of
principal stability. In pursuing this goal, the Fund maintains a diversified
portfolio of shorter-term high-grade municipal debt securities with a
dollar-weighted average effective maturity of between one and five years. Within
this limitation, the Fund may not purchase individual securities with effective
maturities greater than 10 years at the time of purchase or issuance, whichever
is later. To the extent the Fund invests in higher-grade securities, it will be
unable to avail itself of opportunities for higher income which may be available
with lower-grade investments. Except as otherwise indicated, the Fund's
investment objective and policies are not fundamental and may be changed without
a shareholder vote. If there is a change in investment objective, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then current financial position and needs. There can be no assurance that
the Fund's objective will be met.
In computing the dollar-weighted average effective maturity of its
portfolio, the Fund will have to estimate the effective maturity of debt
obligations that are subject to prepayment or redemption by the issuer, based on
projected cash flows from such obligations. In some cases the Adviser will
determine the effective maturity of debt securities. For purposes of the Fund's
investment policy, an instrument will be treated as having a maturity earlier
than its stated maturity date if the instrument has technical features (such as
puts or demand features) or a variable rate of interest which, in the judgment
of the Adviser, will result in the instrument being valued in the market as
though it has the earlier maturity.
SLTTFF's Investments. The Fund may invest in municipal securities that are debt
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel, is
exempt from regular federal income tax. Such municipal securities include
municipal notes, which are generally used to provide short-term capital needs
and have maturities of one year or less. Municipal notes include tax
anticipation notes, revenue anticipation notes, bond anticipation notes and
construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include general obligation bonds which are secured by the
issuer's pledge of its faith, credit and taxing power for payment of principal
and interest, revenue bonds, pre-refunded bonds, industrial development and
other private activity bonds. The Fund may not invest more than 25% of
<PAGE>
its assets in pollution control and industrial revenue bonds or taxable
investments of private sector companies in the same industry. The Fund may also
invest in variable rate demand instruments. Variable rate demand instruments are
securities with long stated maturities but demand features that allow the holder
to demand 100% of the principal plus interest within one to seven days. The
coupon varies daily, weekly or monthly with the market. The price remains at par
and this provides stability to the portfolio at market yields.
For federal income tax purposes, the income earned from municipal
securities may be entirely tax-free, taxable or subject to only the alternative
minimum tax ("AMT"). However, the Fund has no current intention of investing in
municipal securities whose interest income is taxable or AMT bonds.
Normally, the Fund invests at least 65% of its net assets in municipal
securities which are rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Fund's Adviser, to be of comparable quality at the
time of purchase. The Fund will not invest in any debt security rated lower than
Baa by Moody's, BBB by S&P or Fitch or of equivalent quality as determined by
the Adviser. The Fund may, however, invest in a debt security so rated by one
rating agency even though the security may be rated lower by one or more of the
other agencies. (See "ADDITIONAL INFORMATION -- Ratings of Municipal
Obligations").
At least 80% of the Fund's total assets will normally be invested in
municipal bonds and, under normal market conditions, the Fund expects to invest
100% of its portfolio securities in municipal securities. However, if defensive
considerations or an unusual disparity between after-tax income on taxable and
municipal securities makes it advisable, up to 20% of the Fund's assets may be
held in cash or invested in short-term taxable investments, including U.S.
Government obligations and money market instruments. The Fund may temporarily
invest more than 20% of its assets in taxable securities during periods which,
in the Adviser's opinion, require a defensive position. A portion of the Fund's
income may be subject to regular federal, state and local income taxes. It is
impossible to predict for how long such alternative strategies may be utilized.
The Fund may also invest in third-party puts, and when-issued or forward
delivery securities, and may purchase warrants to purchase debt securities, and
may also utilize various other strategic transactions.
Management Strategies. In pursuit of its investment objective, the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, yield, and the relationship of current price to maturity
value. However, recognizing the dynamics of municipal obligation prices in
response to changes in general economic conditions, fiscal and monetary
policies, interest rate levels and market forces such as supply and demand for
various issues, the Adviser, subject to the Trustees' supervision, performs
credit analysis and manages the Fund's portfolio continuously, attempting to
take advantage of opportunities to improve total return, which is a combination
of income and principal performance over the long term. The primary strategies
employed in the management of the Fund's portfolio are:
Emphasis on Credit Analysis. The Fund's portfolio is invested in municipal
obligations rated within, or judged by the Fund's Adviser to be of a quality
comparable to, the four highest rating categories of Moody's, S&P or Fitch, or
in U.S. Government obligations. The ratings assigned by Moody's, S&P or Fitch
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and are not absolute standards of quality. Furthermore, even within this segment
of the municipal obligation market, relative credit standing and market
perceptions thereof may shift.
The Adviser has over many years developed an experienced staff to assign
its own quality ratings which are considered in making value judgments and in
arriving at purchase or sale decisions. Through the discipline of this procedure
the Adviser attempts to discern variations in credit ratings of the published
services and to anticipate changes in credit ratings.
Variations of Maturity. In an attempt to capitalize on the differences in total
return from municipal obligations of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Adviser's
expectations of changes therein. To the extent that the Fund invests in
short-term maturities, capital volatility will generally be reduced.
<PAGE>
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal obligations of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
disparities in yield relationships may afford opportunities to implement a
flexible policy of trading the Fund's holdings in order to invest in more
attractive market sectors or specific issues.
Market Trading Opportunities. In pursuit of the above the Fund may engage in
short-term trading (selling securities held for brief periods of time, usually
less than three months) if the Adviser believes that such transactions, net of
costs, would further the attainment of the Fund's objective. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Fund will be able to take advantage of
them. The Fund intends to limit its voluntary short-term trading to the extent
such limitation is necessary for it to qualify as a "regulated investment
company" under the Internal Revenue Code.
Income Level and Credit Risk. Because the Fund holds high grade municipal
securities, the income earned on shares of the Fund will tend to be less than it
might be on a portfolio emphasizing lower quality securities. Municipal
obligations are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that as a result of
litigation or other conditions the power or ability of any one or more issuers
to pay when due principal of and interest on its or their municipal obligations
may be materially affected. Although the Fund's quality standards are designed
to reduce the credit risk of investing in the Fund, that risk cannot be entirely
eliminated.
General Investment Objectives and Policies of Scudder Medium Term Tax Free Fund
Scudder Medium Term Tax Free Fund, a series of Scudder Tax Free Trust, is
a pure no-load(TM), open-end diversified mutual fund designed for investors
seeking a higher level of federally tax-free income than normally provided by
tax-free money market investments or other short-term investments, and more
price stability than investments in long-term municipal bonds.
The Fund's objectives are to provide a high level of income free from
regular federal income tax and to limit principal fluctuation. The Fund will
invest primarily in high-grade intermediate-term bonds. The dollar-weighted
average effective maturity of the Fund's portfolio will range between five and
ten years. Within this limitation, the Fund may purchase individual securities
with effective maturities no greater than fifteen years. There can be no
assurance that the Fund's objectives will be met.
In computing the dollar-weighted average effective maturity of its
portfolio, the Fund will have to estimate the effective maturity of debt
obligations that are subject to prepayment or redemption by the issuer, based on
projected cash flows from such obligations. In some cases the Adviser will
determine the effective maturity of debt securities. For purposes of the Fund's
investment policy, an instrument will be treated as having a maturity earlier
than its stated maturity date if the instrument has technical features (such as
puts or demand features) or a variable rate of interest which, in the judgment
of the Adviser, will result in the instrument being valued in the market as
though it has the earlier maturity.
Investment Considerations. The municipal securities in which the Fund invests
are debt obligations issued by or on behalf of the District of Columbia, states,
territories, and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is exempt
from regular federal income tax. Such municipal securities include municipal
notes, which are generally used to provide short-term capital needs, and have
maturities of one year or less. Municipal notes include tax anticipation notes,
revenue anticipation notes, bond anticipation notes and construction loan notes.
The Fund may also invest in municipal bonds which meet longer-term capital needs
and generally have maturities of more than one year when issued. Municipal bonds
include general obligation bonds which are secured by the issuer's pledge of its
faith, credit and taxing power for payment of principal and interest, revenue
bonds, prerefunded bonds, industrial development and other private activity
bonds.
<PAGE>
Municipal securities purchased may include the foregoing as well as
variable rate demand instruments. Variable rate demand instruments are
securities with long stated maturities but demand features that allow the holder
to demand 100% of the principal plus interest within 1 to 7 days. The coupon
varies daily, weekly or monthly with the market and the price remains at par;
this provides a great deal of stability to the Fund at market yields. The value
of the underlying variable rate demand instrument may change with changes in
interest rates.
Normally, the Fund invests at least 65% of its net assets in municipal
securities which are rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund will not invest in any debt security rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser. The Fund may, however, invest in a debt security so rated by one rating
agency even though the security may be rated lower by one or more of the other
agencies. Should the rating of a portfolio security be downgraded, the Adviser
will determine whether it is in the best interest of the Fund to retain or
dispose of the security.
Under normal market conditions the Fund expects to invest 100% of its
portfolio securities in municipal securities. However, if defensive
considerations or an unusual disparity between after-tax income on taxable and
municipal securities make it advisable, up to 20% of the Fund's assets may be
held in cash or invested in short-term taxable investments, including U.S.
Government obligations and taxable money market instruments. The Fund may
temporarily invest more than 20% of its assets in taxable securities during
periods which, in the Adviser's opinion, require a defensive position.
Management Strategies and Portfolio Turnover. SMTTFF may engage in short-term
trading (selling securities held for brief periods of time, usually less than 3
months) if the Advisor believes that such transactions, net costs including
taxes, if any, would improve the overall return of its portfolio. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that SMTTFF will be able to take advantage of them.
SMTTFF will limit its voluntary short-term trading to the extent such limitation
is necessary for it to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). (See "TAXES.")
It is anticipated that the portfolio turnover rate will vary considerably
from period to period depending on market developments, but will not be expected
to exceed 100 percent. Higher levels of portfolio activity result in high
transaction costs and may also result in taxes on realized capital gains to be
borne by the Fund's shareholders.
Special Considerations. Because SMTTFF holds high quality municipal securities,
the income earned on shares of the Fund will tend to be less than it might be on
a portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws,
if any, which may be enacted by Congress or state legislatures extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon municipalities to levy
taxes. There is also the possibility that as a result of litigation or other
conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected. Although SMTTFF quality standards are designed to minimize
the credit risk of investing in the Fund, that risk cannot be entirely
eliminated. The Fund also practices other investment strategies that may involve
additional risk. (See "Investments and Investment Techniques Common to the
Funds.")
General Investment Objective and Policies of Scudder Managed Municipal Bonds
Scudder Managed Municipal Bonds, a series of SMT, is a pure no-load(TM)
open-end diversified management investment company (or mutual fund). The
investment objective of SMMB is to provide to investors income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities (as defined below under "Investments and
Investment Techniques Common to the Funds--Municipal Securities"). In contrast
to simply holding a fixed portfolio of municipal securities, SMMB will attempt
to take advantage of opportunities in the market to achieve a higher total
return, i.e., the combination of income and capital performance over the long
term. There can be no assurance that the objective of SMMB will be achieved or
that income to shareholders which is exempt from federal income tax will be
exempt from state or local taxes. In addition, the market prices of municipal
securities, like those of taxable debt securities, vary inversely with interest
rate changes. Thus, the
<PAGE>
net asset value per share can be expected to fluctuate and shareholders may
receive more or less than the purchase price for shares they redeem.
It is a fundamental policy which may not be changed without the approval
of a majority of the outstanding voting securities of SMMB (as defined under
"Investment Restrictions") that at least 80% of SMMB's net assets will be
invested in municipal bonds except as stated in the last sentence of this
paragraph. Subject to this policy and as a matter of nonfundamental policy, the
Fund normally invests at least 65% of its net assets in securities rated, or
issued by an issuer rated, within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund may invest up to 10% of its assets in debt securities rated
lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent quality as
determined by the Adviser, but will not purchase bonds rated below B by Moody's,
S&P or Fitch, or their equivalent. The Fund may also invest up to 20% of its
assets in securities subject to the alternative minimum tax ("AMT bonds"). When,
in the opinion of management, defensive considerations or an unusual disparity
between the after-tax income on taxable investments and comparable municipal
securities make it advisable to do so, up to 20% of SMMB's net assets may be
held in cash, or invested in short-term taxable investments such as (1) U.S.
Treasury notes, bills and bonds; (2) obligations of agencies and
instrumentalities of the U.S. Government; (3) money market instruments, such as
domestic bank certificates of deposit, finance company and corporate commercial
paper, and banker's acceptances; and (4) repurchase agreements (agreements under
which the seller agrees at the time of sale to repurchase the security at an
agreed time and price) with respect to any of the obligations which the Fund is
permitted to purchase. Notwithstanding the foregoing, for temporary defensive
purposes, SMMB may invest more than 20% of its net assets in securities the
interest income from which may be subject to federal income tax to meet
temporary liquidity requirements.
Management Strategies and Portfolio Turnover. In pursuit of its investment
objective, SMMB purchases municipal securities that it believes are attractive
and competitive values in terms of quality and yield. However, recognizing the
dynamics of municipal bond prices in response to changes in general economic and
political conditions, fiscal and monetary policies, interest rate levels and
market forces such as supply and demand for various bond issues, the Adviser,
subject to the Trustees' supervision, performs credit analysis and manages
SMMB's portfolio continuously, attempting to take advantage of opportunities to
improve total return, which is a combination of income and principal performance
over the long term. The primary strategies employed in the management of SMMB's
portfolio are:
1. Emphasis on Quality. As indicated above, the Fund normally invests at
least 65% of its net assets in securities rated, or issued by an issuer rated,
within the three highest quality rating categories of Moody's (Aaa, Aa and A),
S&P or Fitch (AAA, AA and A) or equivalent ratings by another nationally
recognized statistical rating organization, or if unrated, judged by the Adviser
to be of comparable quality at the time of purchase. The Fund may invest up to
10% of its assets in debt securities rated lower than Baa by Moody's, BBB by S&P
or Fitch or of equivalent quality as determined by the Adviser, but will not
purchase bonds rated below B by Moody's, S&P or Fitch, or their equivalent. The
ratings assigned by Moody's, S&P and Fitch represent their opinions as to the
quality of the municipal securities which they undertake to rate. It should be
emphasized, however, that ratings are relative and are not absolute standards of
quality. Furthermore, even within the high quality segment of the municipal bond
market, relative credit standing and market perceptions thereof may shift.
Should the rating of a portfolio security be downgraded the Adviser will
determine whether it is in the best interest of the Fund to retain or dispose of
the security.
The Adviser has over many years developed an experienced staff to assign
its own quality ratings which are considered in making value judgments and in
arriving at purchase or sale decisions. Through the discipline of this procedure
the Adviser attempts to discern variations in credit rankings of the published
services, and to anticipate changes in credit ranking. The Adviser's Bond
Research Group covers the broad spectrum of senior securities and the Adviser is
responsible, among investments other than SMMB's portfolio, for the management
of more than $14 billion in market value of municipal securities.
2. Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal securities of differing maturities, maturities
may be varied according to the structure and level of interest rates, and the
Adviser's expectations of changes therein.
3. Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal securities of the same
or generally similar maturity tend to change constantly in reaction to
<PAGE>
broad swings in interest rates and factors affecting relative supply and demand.
These disparities in yield relationships may afford opportunities to implement a
flexible policy of trading portfolio holdings in order to invest in more
attractive market sectors or specific issues.
4. Market Trading Opportunities. In addition to the above, SMMB may engage
in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Adviser believes that such transactions, net
of costs including taxes, if any, would improve the overall return of its
portfolio. The needs of different classes of lenders and borrowers and their
changing preferences and circumstances have in the past caused market
dislocations unrelated to fundamental creditworthiness and trends in interest
rates which have presented market trading opportunities. There can be no
assurance that such dislocations will occur in the future or that SMMB will be
able to take advantage of them. SMMB will limit its voluntary short-term trading
to the extent such limitation is necessary for it to qualify as a "regulated
investment company" under the Code. (See "TAXES.")
5. Portfolio Turnover Rate. It is anticipated that the portfolio turnover
rate will vary considerably from period to period depending on market
developments, but would not be expected to exceed 100 percent. Higher levels of
portfolio activity result in high transaction costs and may also result in taxes
on realized capital gains to be borne by the Fund's shareholders.
Special Considerations. Because SMMB holds high quality municipal securities,
the income earned on shares of the Fund will tend to be less than it might be on
a portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws,
if any, which may be enacted by Congress or state legislatures extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon municipalities to levy
taxes. There is also the possibility that as a result of litigation or other
conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected. Although SMMB's quality standards are designed to minimize
the credit risk of investing in the Fund, that risk cannot be entirely
eliminated. The Fund also practices other investment strategies that may involve
additional risk. (See "Investments and Investment Techniques Common to the
Funds.")
General Investment Objective and Policies of Scudder High Yield Tax Free Fund
Scudder High Yield Tax Free Fund is a series of SMT. The investment
objective of SHYTFF is to provide a high level of interest income that is exempt
from regular federal income tax, from an actively managed portfolio consisting
primarily of investment-grade municipal securities. SHYTFF will not invest in
municipal securities, the income from which is subject to regular federal income
tax. From time to time, a portion of SHYTFF's distributions may be taxable as
long-term capital gain or, if made from short-term capital gains realized by
SHYTFF, as ordinary income. SHYTFF's income may be subject to the alternative
minimum tax depending upon investors' particular situations. However, no more
than 20% of SHYTFF's net assets will normally be invested in municipal
securities whose interest income is subject to the individual alternative
minimum tax. There can be no assurance that this objective will be achieved or
that income to shareholders which is exempt from federal income tax will be
exempt from state or local taxes. In addition, the market prices of municipal
securities, like those of taxable debt securities, vary inversely with interest
rate changes. Thus, SHYTFF's net asset value per share can be expected to
fluctuate and shareholders may receive more or less than the purchase price for
shares they redeem.
As a nonfundamental policy, SHYTFF expects under normal market conditions
to invest 100% of its portfolio securities in municipal securities. In addition,
SHYTFF has adopted a nonfundamental policy that at least 80% of its net assets
will normally be invested in municipal bonds, the interest on which is not a tax
preference item under the individual alternative minimum tax. However, it is a
fundamental policy which may not be changed without the approval of majority of
SHYTFF's outstanding voting securities that at least 80% of SHYTFF's assets
will, under normal market conditions, be invested in municipal bonds. SHYTFF, as
a matter of fundamental policy, will not invest more than 20% of its total
assets in taxable securities, except that for temporary defensive purposes, the
Fund may invest more than 20% of its assets in taxable securities to meet
temporary liquidity requirements. When, in the Adviser's opinion, temporary
defensive investing is advisable, up to 100% of SHYTFF's assets may be invested
in high quality municipal bonds. Bonds of high quality are rated in the top two
rating categories by Moody's, S&P and Fitch or, if unrated, judged by the
Adviser to be of equivalent quality.
<PAGE>
The Fund will invest at least 50% of its assets in municipal bonds rated,
at the time of purchase, within the four highest quality rating categories of
Moody's (Aaa, Aa, A or Baa), S&P or Fitch (AAA, AA, A or BBB), or their
equivalents as determined by the Adviser. The Fund may invest, however, up to
50% of its total assets in bonds rated below Baa by Moody's or below BBB by S&P
or Fitch, or unrated securities considered to be of equivalent quality by the
Fund's Adviser. The Fund may not invest in bonds rated below B by Moody's, S&P
or Fitch, or their equivalent. These medium-grade bonds ordinarily are higher
yielding than high quality bonds (rated within the two highest rating categories
by Moody's, S&P or Fitch). However, medium-grade bonds also involve greater
credit risk and are subject to greater price volatility than high quality bonds.
In addition, medium-grade bonds may be lower yielding than below
investment-grade bonds. See "Additional Information--Ratings of Municipal and
Corporate Bonds".
Issuers of junk bonds may be highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risks associated
with acquiring the securities of such issuers generally are greater than is the
case with higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. In addition, the market for high yield municipal securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During such
a period, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of junk bonds because such securities may
be unsecured and may be subordinated to other creditors of the issuer.
It is expected that a significant portion of the junk bonds acquired by
SHYTFF will be purchased upon issuance, which may involve special risks because
the securities so acquired are new issues. In such instances SHYTFF may be a
substantial purchaser of the issue and therefore have the opportunity to
participate in structuring the terms of the offering. Although this may enable
the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely SHYTFF's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
Under normal market conditions, SHYTFF expects to invest principally in
municipal securities with long-term maturities (i.e., more than 10 years).
SHYTFF has the flexibility, however, to invest in municipal securities with
short- and medium-term maturities as well.
Management Strategies and Portfolio Turnover. In pursuit of its investment
objective, SHYTFF purchases municipal bonds that it believes are attractive and
competitive values in terms of quality and yield. However, recognizing the
dynamics of municipal bond prices in response to changes in general economic and
political conditions, fiscal and monetary policies, interest levels and market
forces such as supply and demand for various bond issues, the Adviser, subject
to the Trustees' supervision, performs credit analysis and manages SHYTFF's
portfolio continuously, attempting to take advantage of opportunities to improve
total return, which is a combination of income and principal performance over
the long term. The primary strategies employed in the management of SHYTFF's
portfolio are:
1. Emphasis on High Income. As indicated above, SHYTFF expects to invest
primarily in medium-grade municipal bonds rated A or Baa by Moody's, A or BBB by
S&P or A or BBB by Fitch or, if unrated, of equivalent quality as determined by
the Adviser. However, municipal bonds rated within the same rating category may
vary in terms of the creditworthiness of their issuers and market perceptions of
creditworthiness. Therefore, the Adviser reviews continuously the quality of
municipal bonds in which SHYTFF invests. Should the rating of a portfolio
security be downgraded the Adviser will determine whether it is in the best
interest of the Fund to retain or dispose of the security.
<PAGE>
The Adviser has over many years developed an experienced staff to assign
its own quality ratings which are considered in making value judgments and in
arriving at purchase or sale decisions. Through the discipline of this procedure
the Adviser attempts to discern variations in credit rankings of the published
services, and to anticipate changes in credit ranking.
The Adviser's Bond Research Group covers the broad spectrum of senior
securities and the Adviser is responsible, among investments other than SHYTFF's
portfolio, for the management of more than $14 billion in market value of
municipal bonds.
2. Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal bonds of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Adviser's
expectations of changes thereto.
3. Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal bonds of the same or
generally similar maturity tend to change constantly in reaction to broad swings
in interest rates and factors affecting relative supply and demand. These
disparities in yield relationships may afford opportunities to implement a
flexible policy of trading portfolio holdings in order to invest in more
attractive market sectors or specific issues.
4. Market Trading Opportunities. In addition to the above, SHYTFF may
engage in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Adviser believes that such transactions, net
of costs including taxes, if any, would improve the overall return of its
portfolio. The needs of different classes of lenders and borrowers and their
changing preferences and circumstances have in the past caused market
dislocations unrelated to fundamental creditworthiness and trends in interest
rates which have presented market trading opportunities. There can be no
assurance that such dislocations will occur in the future or that SHYTFF will be
able to take advantage of them. SHYTFF will limit its voluntary short-term
trading to the extent such limitation is necessary to qualify as a "regulated
investment company" under the Code. (See "TAXES.")
5. Portfolio Turnover Rate. It is anticipated that the portfolio turnover
rate will vary considerably from period to period depending on market
developments, but would not be expected to exceed 100 percent. Higher levels of
portfolio activity result in high transaction costs and may also result in taxes
on realized capital gains to be borne by the Fund's shareholders.
Special Considerations. Because under normal market conditions SHYTFF holds
medium-grade municipal bonds, the income earned on shares of the Fund will tend
to be higher than it might be on a portfolio emphasizing higher quality
securities. However, the credit risk of holding medium-grade municipal bonds is
greater than that pertaining to higher quality securities. Municipal obligations
are subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by Congress or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon municipalities to levy
taxes. There is also the possibility that as a result of litigation or other
conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected. The Fund also practices other investment strategies that
may involve additional risk. (See "Investments and Investment Techniques Common
to the Funds.")
Risk Factors
High Yield, High Risk Securities. Below investment-grade securities (rated Ba
and lower by Moody's and BB and lower by S&P) or unrated securities of
equivalent quality, in which the Fund may invest carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories and are considered speculative. The lower the ratings of such debt
securities, the greater their risks. See the Appendix to this Statement of
Additional Information for a more complete description of the ratings assigned
by ratings organizations and their respective characteristics.
<PAGE>
Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have an adverse impact on the value of such
obligations. During an economic downturn or period of rising interest rates,
highly leveraged issues may experience financial stress which could adversely
affect their ability to service their principal and interest payment
obligations. Prices and yields of high yield securities will fluctuate over time
and, during periods of economic uncertainty, volatility of high yield securities
may adversely affect a Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
Master/feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques Common to the Funds
As discussed below, the following description of investments and
investment techniques is applicable to more than one of the Funds.
Municipal Securities. Municipal Securities are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on these obligations is generally exempt from federal
income tax in the hands of most investors, except for the possible applicability
of the alternative minimum tax. The two principal classifications of municipal
securities are "Notes" and "Bonds."
<PAGE>
1. Municipal Notes. Municipal Notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds, which meet longer term capital needs
and generally have maturities of more than one year when issued, have two
principal classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected. Each Fund, with the exception of SLTTFF, may invest more than 25%
of its assets in industrial development or other private activity bonds, subject
to each Fund's fundamental investment policies, and also subject to each Fund's
current intention not to invest in municipal securities whose investment income
is taxable or AMT bonds, or in the case of SHYTFF, subject to the Fund's 20%
limitation on investing in AMT bonds. For the purposes of each Fund's investment
limitation regarding concentration of investments in any one industry,
industrial development or other private activity bonds ultimately payable by
companies within the same industry will be considered as if they were issued by
issuers in the same industry.
3. Municipal Lease Obligations and Participation Interests. A municipal
lease obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover the Fund's original investment.
<PAGE>
Participation interests represent undivided interests in municipal leases,
installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by the Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace in which the
security trades. In addition, the Adviser will consider factors unique to
particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.
The Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide the Fund with the right to a pro rata undivided interest
in the underlying municipal lease obligations. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of the Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. The Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
state income tax, if applicable.
4. Other Municipal Securities. There is, in addition, a variety of hybrid
and special types of municipal securities as well as numerous differences in the
security of municipal securities both within and between the two principal
classifications above.
The Funds may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Fund, or (3) to maintain a
high quality investment portfolio or (4) to maximize the Fund's yield. A bank
that issues a repurchase commitment may receive a fee from a Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that a Fund may purchase are payable
on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Funds will
determine the variable rate demand instruments that they will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
a Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of a Fund. The Adviser will
reevaluate each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet the Fund's quality
criteria.
<PAGE>
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. The Funds may purchase variable rate demand instruments on
which stated minimum or maximum rates, or maximum rates set by state law, limit
the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent it does, increases or decreases in value of such
variable rate demand notes may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the variable
rate demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
The maturity of the variable rate demand instruments held by the Funds
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
5. General Considerations. An entire issue of Municipal Securities may be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933, as amended (the "1933
Act") prior to offer and sale unless an exemption from such registration is
available, municipal securities which are not publicly offered may nevertheless
be readily marketable. A secondary market exists for municipal securities which
were not publicly offered initially.
Securities purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the identification
of the "issuer" of municipal securities which are not General Obligation Bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal securities whose issuers are located in the same state or
more than 25% of its total assets in municipal securities the security of which
is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; or colleges and
universities. Each Fund may invest more than 25% of its total assets in
municipal securities of one or more of the following types: public housing
authorities; general obligations of states and localities; lease rental
obligations of states and local authorities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. There could be economic, business or
political developments, which might affect all municipal securities of a similar
type. However, the Funds believe that the most important consideration affecting
risk is the quality of particular issues of municipal securities rather than
factors affecting all, or broad classes of, municipal securities.
When-Issued or Forward Delivery Securities. The Funds may purchase securities
offered on a "when-issued" or "forward delivery" basis. When so offered, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by the purchaser to the
issuer and no interest on the when-issued or forward delivery security accrues
to the purchaser. To the extent that assets of a Fund are not invested prior to
the settlement of a purchase of securities, that Fund will earn no income;
however, it is intended that each Fund will be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, it is
intended that each Fund will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Funds
do not believe that the net asset value or income of their portfolios will be
adversely affected by their purchase of securities on a when-issued or forward
delivery basis. Each Fund will establish with its custodian a segregated account
in which it will maintain cash or liquid assets, equal in value to commitments
for when-issued or forward delivery securities. Such segregated securities may
mature or be sold, if necessary, on or before the settlement date. The Funds
will not enter into such transactions for leverage purposes.
<PAGE>
Stand-by Commitments. Each Fund, with the exception of SLTTFF, may engage in
Stand-by Commitments. STFMF has received an order from the SEC which will enable
it to improve its portfolio liquidity by making available same-day settlements
on portfolio sales (and thus facilitate the same-day payments of redemption
proceeds in federal funds) through the acquisition of "Stand-by Commitments."
SMTTFF, SMMB and SHYTFF may engage in such transactions subject to the
limitations in the rules under the Investment Company Act of 1940, as amended
(the "1940 Act"). A Stand-by Commitment is a right acquired by a Fund, when it
purchases a municipal security from a broker, dealer or other financial
institution ("seller"), to sell up to the same principal amount of such
securities back to the seller, at that Fund's option, at a specified price.
Stand-by Commitments are also known as "puts." STFMF's, SMMB's and SHYTFF's
investment policies permit the acquisition of Stand-by Commitments solely to
facilitate portfolio liquidity. The acquisition of or the power to exercise a
Stand-by Commitment will not affect the valuation or maturity of STFMF's
underlying portfolio, which will be valued in accordance with the order of the
SEC. The exercise by a Fund of a Stand-by Commitment is subject to the ability
of the other party to fulfill its contractual commitment.
Stand-by Commitments acquired by the Funds will have the following
features: (1) they will be in writing and will be physically held by a Fund's
custodian; (2) a Fund's rights to exercise them will be unconditional and
unqualified; (3) they will be entered into only with sellers which in the
Adviser's opinion present a minimal risk of default; (4) although Stand-by
Commitments will not be transferable, municipal securities purchased subject to
such commitments may be sold to a third party at any time, even though the
commitment is outstanding; and (5) their exercise price will be (i) a Fund's
acquisition cost (excluding the cost, if any, of the Stand-by Commitment) of the
municipal securities which are subject to the commitment (excluding any accrued
interest which a Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period a Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date. Since STFMF will value
municipal securities on an amortized cost basis, the amount receivable upon
exercise of a Stand-by Commitment will be substantially the same as the value
assigned by that Fund to the underlying securities. Moreover, while there is
little risk of an event occurring which would make amortized cost valuation of
its portfolio securities inappropriate, if such condition developed, the
securities may, in the discretion of the Trustees, be valued on the basis of
available market information and held to maturity. Each Fund expects to refrain
from exercising a Stand-by Commitment in the event that the amount receivable
upon exercise of the Stand-by Commitment is significantly greater than the then
current market value of the underlying municipal securities in order to avoid
imposing a loss on a seller and thus jeopardizing that Fund's business
relationship with that seller.
The Funds expect that Stand-by Commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, each Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding Stand-by Commitments will not
exceed 1/2 of 1% of the value of total assets of that Fund calculated
immediately after any Stand-by Commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential benefit
of a Stand-by Commitment. Therefore, it is expected that the Funds' Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, in
the case of SMTTFF, if the market price of the security subject to the Stand-by
Commitment is less than the exercise price of the Stand-by commitment, such
security will ordinarily be valued at such exercise price. When each Fund has
paid for a Stand-by Commitment, its cost will be reflected as unrealized
depreciation for the period during which the commitment is held. In addition,
for purposes of complying with the condition of the SEC's amortized cost Rule
that the dollar-weighted average maturity of its portfolio shall not exceed 90
days, the maturity of a portfolio security of STFMF shall not be considered
shortened or otherwise affected by any Stand-by Commitment to which such
security is subject.
<PAGE>
Management of the Funds understands that the Internal Revenue Service (the
"Service") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The Service
has also issued private letter rulings to certain taxpayers (which do not serve
as precedent for other taxpayers) to the effect that tax-exempt interest
received by a regulated investment company with respect to such obligations will
be tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The Service has subsequently
announced that it will not ordinarily issue advance ruling letters as to the
identity of the true owner of property in cases involving the sale of securities
or participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each of the Funds intends to take the position that it
owns any municipal obligations acquired subject to a Stand-by Commitment and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the Service will agree
with such position in any particular case. There is no assurance that Stand-by
Commitments will be available to the Funds nor has any of the Funds assumed that
such commitments would continue to be available under all market conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals (not exceeding 397 calendar days in the
case of STFMF) to tender (or "put") the bonds to the institution and receive the
face value thereof (plus accrued interest). These third party puts are available
in several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features such as interest rate
swaps. The Fund receives a short-term rate of interest (which is periodically
reset), and the interest rate differential between that rate and the fixed rate
on the bond is retained by the financial institution. The financial institution
granting the option does not provide credit enhancement, and in the event that
there is a default in the payment of principal or interest, or downgrading of a
bond to below investment grade, or a loss of the bond's tax-exempt status, the
put option will terminate automatically, the risk to the Fund will be that of
holding such a long-term bond and, in the case of STFMF, the dollar-weighted
average maturity of the Fund's portfolio would be adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-by Commitments discussed above. As with any Stand-by
Commitments acquired by a Fund, the Fund intends to take the position that it is
the owner of any municipal obligation acquired subject to a third-party put, and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the Service will agree
with such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of tender fees and swap payments, in relation to various regulated investment
company tax provisions is unclear. However, the Adviser intends to manage the
Funds' portfolios in a manner designed to minimize any adverse impact from these
investments.
Repurchase Agreements. Each Fund, with the exception of SLTTFF, may enter into
repurchase agreements with any member bank of the Federal Reserve System or any
domestic broker/dealer which is recognized as a reporting government securities
dealer if the creditworthiness of the bank or broker/dealer has been determined
by the Adviser to be at least as high as that of other issuers of obligations
the Fund may purchase or to be at least equal to that of issuers of commercial
paper rated within the two highest grades assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable income
on funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a Fund) acquires a security ("obligation") and the seller
agrees, at the time of sale, to repurchase the obligation at a specified time
and price. The repurchase price may be higher than the purchase price, the
difference being income to a Fund, or the purchase and repurchase prices may be
the same, with interest at a stated rate due to a Fund together with the
repurchase price upon repurchase. In either case, the income to a Fund (which is
taxable) is unrelated to the interest rate on the obligation itself. Obligations
will be physically held by the custodian or in the Federal Reserve Book Entry
system.
<PAGE>
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by that Fund to the seller. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the obligation before repurchase of the obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the obligation. If the court characterized the transaction as a loan
and a Fund has not perfected a security interest in the obligation, that Fund
may be required to return the obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, a Fund would
be at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the obligation, in which
case a Fund may incur a loss if the proceeds to that Fund from the sale to a
third party are less than the repurchase price. However, if the market value of
the obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund involved will direct the seller
of the obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
impose on the seller a contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. STFMF and SMTTFF may enter into "reverse
repurchase agreements," which are repurchase agreements in which a Fund, as the
seller of the securities, agrees to repurchase them at an agreed time and price.
STFMF and SMTTFF will maintain a segregated account with its custodian
containing cash, U.S. Government securities and other high grade debt
obligations equal in value to its obligation in connection with outstanding
reverse repurchase agreements. STFMF may also acquire participation in privately
negotiated loans to municipal borrowers provided that the interest received by
the Fund is exempt, in the opinion of bond counsel to the municipal borrower,
from federal income tax. Reverse repurchase agreements are borrowings subject to
STFMF's and SMTTFF's investment restrictions applicable to that activity.
Participation Interests. STFMF may purchase from banks participation interests
in all or part of specific holdings of municipal securities. Each participation
is backed by an irrevocable letter of credit or guarantee of the selling bank
that the Adviser has determined meets the prescribed quality standards of each
Fund. Thus, even if the credit of the issuer of the municipal security does not
meet the quality standards of STFMF, the credit of the selling bank will. STFMF
has the right to sell the participation back to the bank after seven days'
notice for the full principal amount of the Fund's interest in the municipal
security plus accrued interest, but only (1) as required to provide liquidity to
the Fund, (2) to maintain a high quality investment portfolio or (3) upon a
default under the terms of the municipal security. The selling bank may receive
a fee from STFMF in connection with the arrangement. STFMF will not purchase
participation interests unless it receives an opinion of counsel or a ruling of
the Internal Revenue Service satisfactory to the Trustees of the Fund that
interest earned by the Fund on municipal obligations in which it holds
participation interests is exempt from federal income tax. An opinion of counsel
is not binding on the Service and there is no assurance that the Service will
agree with any opinion of counsel.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time. While the Trustees
do not currently intend to borrow for investment leverage purposes, if such a
strategy were implemented in the future it would increase the Fund's volatility
and the risk of loss in a declining market. Borrowing by the Fund will involve
special risk considerations. Although the principal of the Fund's borrowings
will be fixed, the Fund's assets may change in value during the time a borrowing
is outstanding, thus increasing exposure to capital risk.
Strategic Transactions and Derivatives. Each Fund, with the exception of STFMF
may, but is not required to, utilize various other investment strategies as
described below to hedge various market risks (such as interest rates and broad
or specific market movements), to manage the effective maturity or duration of
the Fund's portfolio, or to enhance potential gain. These strategies may be
executed through the use of derivative contracts. Such strategies are generally
accepted as a part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
<PAGE>
In the course of pursuing these investment strategies, the Funds may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of the Funds' net assets
are required to be invested in tax-exempt municipal securities, and as limited
by the Funds' other investment restrictions) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Funds' portfolio resulting from securities markets fluctuations, to
protect the Funds' unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Funds' portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of each Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Funds to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Funds will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Funds, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Funds can realize on its
investments or cause the Funds to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Funds creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Funds' position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. A Fund is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
<PAGE>
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the SEC currently takes the position that
OTC options purchased by a Fund, and portfolio securities "covering" the amount
of a Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
a Fund's limitation on investing no more than 10% of its assets in illiquid
securities.
<PAGE>
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
A Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require a Fund to hold a
security or instrument which it might otherwise have sold.
A Fund may purchase and sell put options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. A Fund will not sell put options if, as a result, more than 50% of a
Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. A Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by a Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that 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 and obligates the seller to deliver such position.
A Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
A Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of a Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. A Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
<PAGE>
Combined Transactions. A Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. A Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. A Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream a Fund
may be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and a Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. A Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. A Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
<PAGE>
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate cash or liquid assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
<PAGE>
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. (See "TAXES.")
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted or illiquid securities" or "not
readily marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public, and
in such event the Fund may be liable to purchasers of such securities if such
sale is made in violation of the 1933 Act or if the registration statement
prepared by the issuer, or the prospectus forming a part of it, is materially
inaccurate or misleading.
The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Board of Trustees. In reaching liquidity
decisions, the Adviser will consider the following factors: (1) the frequency of
trades and quotes for the security, (2) the number of dealers wishing to
purchase or sell the security and the number of their potential purchasers, (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (i.e. the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Trustees' Power to Change Objectives and Policies
The objectives and policies of the Funds described above may be changed,
unless expressly stated to the contrary, by their respective Trustees without a
vote of their shareholders.
Investment Restrictions
Unless specified to the contrary, the following restrictions are
fundamental policies and may not be changed with respect to each of the Funds
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% of the shares
of such Fund present at a meeting if the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of such Fund. Any nonfundamental policy of a
Fund may be modified by the Fund's Trustees without a vote of the Fund's
shareholders.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Funds.
As a matter of fundamental policy, each Fund may not:
(1) borrow money, except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
<PAGE>
(3) concentrate its investments in a particular industry, as that term
is used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired
as a result of the Fund's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities;
(7) make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's investment objective and
policies may be deemed to be loans.
In addition, as a matter of fundamental policy, each of Scudder High Yield
Tax Free Fund, Scudder Managed Municipal Bonds, Scudder Medium Term Tax Free
Fund and Scudder Limited Term Tax Free Fund will:
(8) have at least 80% of its net assets invested in municipal securities
during periods of normal market conditions.
In addition, as a matter of fundamental policy, Scudder Tax Free Money
Fund will:
(9) have at least 80% of its net assets invested in short-term municipal
securities during periods of normal market conditions.
As a matter of nonfundamental policy, each of Scudder High Yield Tax Free
Fund, Scudder Limited Term Tax Free Fund, Scudder Managed Municipal Bonds and
Scudder Medium Term Tax Free Fund may not:
(a) borrow money in an amount greater than 5% of its total assets, except
for temporary or emergency purposes;
(b) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage transactions,
(iii) for margin deposits in connection with futures contracts,
options or other permitted investments, (iv) that transactions in
futures contracts and options shall not be deemed to constitute
selling securities short, and (v) that the Fund may obtain such
short-term credits as may be necessary for the clearance of securities
transactions;
(c) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(d) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate
initial margin with respect to such futures contracts entered
into on behalf of the Fund and the premiums paid for such options
on futures contracts does not exceed 5% of the fair market value
of the Fund's total assets; provided that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(e) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of
the value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to
have no value); and
(f) lend portfolio securities in an amount greater than 5% of its
total assets.
In addition, as a matter of nonfundamental policy, Scudder Tax Free Money
Fund may not:
(g) borrow money in an amount greater than 5% of its total assets, except
for temporary or emergency purposes; and
(h) lend portfolio securities in an amount greater than 5% of its total
assets.
<PAGE>
PURCHASES
(See "Purchases" and "Transaction information" in the Funds' prospectus.)
Additional Information About Opening an Account
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. ("NASD"), and banks may open an
account by wire. These investors must call 1-800-225-5163 to get an account
number. During the call, the investor will be asked to indicate the Fund name,
the amount to be wired ($2,500 minimum), the name of the bank or trust company
from which the wire will be sent, the exact registration of the new account, the
tax identification or Social Security number, address and telephone number. The
investor must then call the bank to arrange a wire transfer to The Scudder
Funds, State Street Bank and Trust Company, Boston, Massachusetts 02101 ABA
Number 011000028, DDA Account Number 9903-5552. The investor must give the
Scudder fund name, account name and the new account number. Finally, the
investor must send a completed and signed application to the Fund promptly.
Checks
A certified check is not necessary, but checks are only accepted subject to
collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Trusts reserve the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by that Fund or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, such Fund will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
In the case of SLTTFF, SMTTFF, SMMB and SHYTFF, to purchase shares of a
Fund and obtain the same day's dividend, and in the case of STFMF to obtain the
net asset value determined as of twelve o'clock noon, you must have your bank
forward federal funds by wire transfer and provide the required account
information so as to be available to the Fund prior to twelve o'clock noon
eastern time on that day. If you wish to make a purchase of $500,000 or more you
should notify the Fund's transfer agent, Scudder Service Corporation (the
"Transfer Agent") of such a purchase by calling 1-800-225-5163. If either the
federal funds or the account information is received after twelve o'clock noon
eastern time but both the funds and the information are made available before
the close of regular trading on the New York Stock Exchange (the "Exchange")
(normally 4 p.m. eastern time), on any business day, shares will be purchased at
net asset value determined on that day but will not receive the dividend; in
such cases, dividends commence on the next business day.
<PAGE>
For each Fund the bank sending an investor's federal funds by bank wire
may charge for the service. Presently the Distributor pays a fee for receipt by
State Street Bank (the "Custodian") of "wired funds," but the right to charge
investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may be
open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of a Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before 4 p.m. eastern time. Proceeds in the
amount of your purchase will be transferred from your bank checking account two
or three business days following your call. For requests received by the close
of regular trading on the Exchange, shares will be purchased at the net asset
value per share calculated at the close of trading on the day of your call.
QuickBuy requests received after the close of regular trading on the Exchange
will begin their processing and be purchased at the net asset value calculated
the following business day. If you purchase shares by QuickBuy and redeem them
within seven days of the purchase, the Fund may hold the redemption proceeds for
a period of up to seven business days. If you purchase shares and there are
insufficient funds in your bank account the purchase will be canceled and you
will be subject to any losses or fees incurred in the transaction. QuickBuy
transactions are not available for most retirement plan accounts. However,
QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share Price
Purchases will be filled without sales charge at the net asset value next
computed after receipt of a purchase order in good order. Net asset value for
STFMF normally is computed twice a day, as of twelve o'clock noon and the close
of regular trading on the Exchange on each day the Exchange is open for trading.
Net asset value for SLTTFF, SMTTFF, SMMB and SHYTFF normally is computed as of
the close of regular trading on each day the Exchange is open for trading.
Orders received after such close will be filled at the net asset value per share
on the following business day. If the order has been placed by a member of the
NASD, other than the Distributor, it is the responsibility of that member
broker, rather than a Fund, to forward the purchase order to the Transfer Agent
in Boston by the close of regular trading on the Exchange.
<PAGE>
Share Certificates
Due to the desire of the Funds' management to afford ease of redemption,
certificates will not be issued to indicate ownership in the Funds. Share
certificates now in a shareholder's possession may be sent to the Transfer Agent
for cancellation and credit to such shareholder's account. Shareholders who
prefer may hold the certificates in their possession until they wish to exchange
or redeem such shares. See "Purchases" and "Exchanges and redemptions" in the
Funds' prospectus.
Other Information
The Funds have authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on each Fund's behalf. Orders for purchase or redemption will be deemed
to have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at that Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Funds' principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of a Fund at any time for any reason.
The "Tax Identification Number" section of the Funds' application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g., from exempt investors a certification of exempt status) will
be returned to the investor.
A Fund may issue shares at net asset value in connection with any merger
or consolidation with, or acquisition of, the assets of any investment company
(or series thereof) or personal holding company, subject to the requirements of
the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information"
in the Funds' prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and the
purchase of another Scudder fund to an existing account or newly established
account. When an exchange involves a new account, the new account will be
established with the same registration, tax identification number, address,
telephone redemption option, "Scudder Automated Information Line" (SAIL)
transaction authorization, and dividend option as the existing account. Other
features will not carry over automatically to the new account. Exchanges to a
new fund account must be for a minimum of $2,500. When an exchange represents an
additional investment into an existing account, the account receiving the
exchange proceeds must have identical registration, tax identification number,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more. If the account receiving the
exchange proceeds is to be different in any respect, the exchange request must
be in writing and must contain a signature guarantee as described under
"Transaction information--Redeeming shares--Signature Guarantee" in the Fund's
prospectus.
<PAGE>
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder Fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the phone or in writing. Automatic
Exchanges will continue until the shareholder requests by telephone or in
writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above. An
exchange into another Scudder fund is a redemption of shares, and therefore may
result in tax consequences (gain or loss) to the shareholder and the proceeds of
such exchange may be subject to backup withholding (See "TAXES").
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. The Trusts employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trusts do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trusts will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine. The Trusts and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.
Redemption by Telephone
In order to request redemptions by telephone, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which the redemption proceeds are to be sent.
The proceeds will not be mailed or wired other than to a predesignated bank
account. Shareholders currently receive the right to redeem up to $100,000 to
their address of record automatically, without having to elect it.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone redemption to a
designated bank account or who want to change the bank account
previously designated to receive redemption payments should either
return a Telephone Redemption Option Form (available upon request) or
send a letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. A signature and a
signature guarantee are required for each person in whose name the
account is registered.
Shareholders of STFMF who have elected "telephone redemption" may
telephone before twelve o'clock noon and request that proceeds of their
redemption be wired to the designated bank on the same day. Shareholders
redeeming before noon will receive the net asset value per share determined as
of twelve o'clock noon and will not receive the dividend on the day of
redemption.
<PAGE>
Shareholders of STFMF whose redemption requests are received by the Fund's
transfer agent after twelve o'clock noon eastern time and prior to 4 p.m. will
receive the net asset value per share determined as of 4 p.m. and will receive
that day's dividend for the day of redemption. Proceeds will normally be mailed
on the next business day or wired on the next day on which State Street Bank is
open for business. Redemption requests received by the Fund's Transfer Agent
after 4 p.m. will receive the net asset value on the next business day.
If a request for redemption to a shareholder's bank account is made by
telephone or telegram, payment will be made by Federal Reserve bank wire to the
bank account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone redemption
proceeds are advised that if the savings bank is not a participant in the
Federal Reserve System, redemption proceeds must be wired through a
commercial bank which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested that investors
wishing to use a savings bank discuss wire procedures with their bank and
submit any special wire transfer information with the telephone redemption
authorization. If appropriate wire information is not supplied, redemption
proceeds will be mailed to the designated bank.
The Trusts employ procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Trusts do
not follow such procedures, they may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Trusts will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of the Fund by telephone. To sell shares
by QuickSell, shareholders should call before 4 p.m. eastern time. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be redeemed at the net asset value per share
calculated at the close of trading on the day of your call. QuickSell requests
received after the close of regular trading on the Exchange will begin their
processing and be redeemed at the net asset value calculated the following
business day. QuickSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signatures guaranteed as explained in the
Funds' Prospectus.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
<PAGE>
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
Redemption by Write-A-Check
All new investors and existing shareholders of STFMF, SLTTFF and SMTTFF
who apply for checks may use them to pay any person, provided that each check is
for at least $100 and not more than $5 million. By using the checks, the
shareholder will receive daily dividend credit on his or her shares until the
check has cleared the banking system. Investors who purchased shares by check
may write checks against those shares only after they have been on each Fund's
books for seven business days. Shareholders who use this service may also use
other redemption procedures. No shareholder may write checks against
certificated shares. The Funds pay the bank charges for this service. However,
each Fund will review the cost of operation periodically and reserves the right
to determine if direct charges to the persons who avail themselves of this
service would be appropriate. The Funds, Scudder Service Corporation and State
Street Bank and Trust Company each reserves the right at any time to suspend or
terminate the "Write-A-Check" procedure.
Checks will be returned by the Custodian if there are insufficient shares
to meet the withdrawal amount. Potential fluctuations in the per share value of
SMTTFF should be considered in determining the amount of the check. An investor
should not attempt to close an account by check, because the exact balance at
the time the check clears will not be known when the check is written.
Other Information
If a shareholder redeems all shares in the account, the shareholder will
receive, in addition to the net asset value thereof, all declared but unpaid
dividends thereon. The value of shares redeemed or repurchased may be more or
less than a shareholder's cost depending upon the net asset value at the time of
the redemption or repurchase. None of the Funds imposes a redemption or
repurchase charge, although a wire charge may be applicable for redemption
proceeds wired to a shareholder's bank account. Redemption of shares, including
redemptions undertaken to effect an exchange for shares of another Scudder fund,
and including exchanges and redemptions with STFMF, SLTTFF and SMTTFF by
Write-A-Check, may result in tax consequences (gain or loss) to the shareholder,
and the proceeds of such redemptions may be subject to backup withholding (see
"TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts should
contact the employer, trustee or custodian of the Plan for the requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefor may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted, (c) during which an emergency exists as a result of which disposal
by the Fund involved of securities owned by it is not reasonably practicable or
it is not reasonably practicable for that Fund fairly to determine the value of
its net assets, or (d) during which the SEC by order permits such suspension of
the right of redemption or a postponement of the date of payment or of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
Shareholders should maintain a share balance worth at least $2,500 ($1,000
for IRAs, Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts),
which amount may be changed by the Board of Trustees. Scudder retirement plans
have similar or lower minimum balance requirements. A shareholder may open an
account with at least $1,000 ($500 for an UGMA, UTMA, IRA and other retirement
accounts), if an automatic investment plan (AIP) of $100/month ($50/month for an
UGMA, UTMA, IRA and other retirement accounts) is established.
<PAGE>
Shareholders who maintain a non-fiduciary account balance of less than
$2,500 in a Fund, without establishing an AIP, will be assessed an annual $10.00
per fund charge with the fee to be reinvested in the Fund. The $10.00 charge
will not apply to shareholders with a combined household account balance in any
of the Scudder Funds of $25,000 or more. Each Fund reserves the right, following
60 days' written notice to shareholders, to redeem all shares in accounts below
$250, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. Each Fund will mail
the proceeds of the redeemed account to the shareholder at the address of
record. Reductions in value that result solely from market activity will not
trigger an involuntary redemption. UGMA, UTMA, IRA and other retirement accounts
will not be assessed the $10.00 charge or be subject to automatic liquidation.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "Shareholder benefits" in the Funds' prospectus.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its funds from the vast
majority of mutual funds available today. The primary distinction is between
load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not a fund also
charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Rules of Fair Practice, a mutual fund
can call itself a "no-load" fund only if the 12b-1 fee and/or service fee does
not exceed 0.25% of a fund's average annual net assets.
Because Scudder funds do not pay any asset-based sales charges or service
fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish funds in the Scudder Family of Funds from other no-load mutual
funds. Scudder pioneered the no-load concept when it created the nation's first
no-load fund in 1928, and later developed the nation's first family of no-load
mutual funds. The Scudder Family of Funds consists of those Funds or classes of
Funds advised by Scudder which are offered without commissions to purchase or
redeem shares or to exchange from one Fund to another.
The following chart shows the potential long-term advantage of investing
$10,000 in a Scudder pure no-load fund over investing the same amount in a load
fund that collects an 8.50% front-end load, a load fund that collects only a
0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25% 12b-1
and/or service fee. The hypothetical figures in the chart show the value of an
account assuming a constant 10% rate of return over the time periods indicated
and reinvestment of dividends and distributions.
<PAGE>
Scudder No-Load Fund
YEARS Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
10 $25,937 $23,733 $24,222 $25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
Investors are encouraged to review the fee tables on pages 2, 3 and 4 of
the Fund's prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties on
Prodigy since 1988 and has participated since 1994 in GALT's Networth "financial
marketplace" site on the Internet. The firm made Scudder Funds information
available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions for
an account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call MeTM feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call MeTM feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
<PAGE>
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income, or distributions from realized capital
gains in additional shares of the same Fund. A change of instructions for the
method of payment must be received by the Fund's transfer agent at least 5 days
prior to a dividend record date. Shareholders may change their dividend option
either by calling 1-800-225-5163 or by sending written instructions to the
Transfer Agent. Please include your account number with your written request.
See "How to contact Scudder" in the prospectus for the address.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the transfer agent designating their option for either
reinvestment or cash distributions of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the relevant Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gains distributions automatically deposited to their personal
bank account usually within three business days after a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor. The Centers are designed to provide individuals with services
during any business day. Investors may pick up literature or obtain assistance
with opening an account, adding monies or special options to existing accounts,
making exchanges within the Scudder Family of Funds, redeeming shares or opening
retirement plans. Checks should not be mailed to the Centers but should be
mailed to "The Scudder Funds" at the address listed under "How to contact
Scudder" in the Funds' prospectus.
Reports to Shareholders
All three Trusts issue to their respective shareholders annual and
semiannual financial statements (audited annually by independent accountants),
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets and financial highlights for that Fund, as the
case may be.
Diversification
A shareholder's investment represents an interest in a large, diversified
portfolio of carefully selected securities. Diversification may protect
investors against the possible risks associated with concentrating in fewer
securities.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds and
the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
<PAGE>
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability of
capital and, consistent therewith, to maintain the liquidity of capital
and to provide current income. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a high
degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.
- -------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
<PAGE>
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
- -------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
<PAGE>
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in
foreign currencies and the U.S. dollar. As a secondary objective, the Fund
will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As a
secondary objective, the Fund seeks protection and possible enhancement of
principal value by actively managing currency, bond market and maturity
exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current income
and, secondarily, long-term capital appreciation through investments
primarily in high-yielding debt securities issued by governments and
corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund seeks long-term growth of capital through investment in
undervalued equity securities.
<PAGE>
Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.
GLOBAL GROWTH
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.
Scudder Global Discovery Fund seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity securities
and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital appreciation
through investment primarily in the securities of Latin American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) of
Japanese companies.
<PAGE>
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds may not be available
for purchase or exchange. For more information, please call 1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
Investment Plan"
and "Exchanges and redemptions--By Automatic Withdrawal Plan" in the Fund's
prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. It is
advisable for an investor considering the funding of the investment plans
described below to consult with an attorney or other investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit sharing
and pension plans and IRA's other than those offered by the Fund's distributor
depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000 or
more of shares of the Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information--Redeeming shares--Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the [Trust, Corporation] or its agent on written notice, and will
be terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the [Trust, Corporation] of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
<PAGE>
Cash Management System ---Group Sub-Accounting Plan for
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations, arrangements
have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.
In its discretion, a Fund may accept minimum initial investments of less
than $2,500 (per Portfolio) as part of a continuous group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments, employee benefit
plans) provided that the average single account in any one Fund or Portfolio in
the group purchase plan will be $2,500 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which they
were permitted to initiate accounts under $2,500 will be subject to the minimum
account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of investment program may be suitable for
various investment goals such as, but not limited to, college planning or saving
for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trusts reserve the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
<PAGE>
DIVIDENDS
(See "Distribution and performance information" in the Funds' prospectus.)
Scudder Tax Free Money Fund
The net investment income of STFMF is determined as of the close of
regular trading on the Exchange, usually 4 p.m., eastern time, on each day the
Exchange is open for trading.
All the investment income of STFMF so determined normally will be declared
as a dividend to shareholders of record as of determination of the net asset
value at twelve o'clock noon after the purchase and redemption of shares. Shares
purchased as of the determination of net asset value made as of the close of the
Exchange will not participate in that day's dividend; in such cases dividends
commence on the next business day. Checks will be mailed to shareholders
electing to take dividends in cash, and confirmations will be mailed to
shareholders electing to invest dividends in additional shares for the month's
dividends on the fourth business day of the next month. Dividends will be
invested at the net asset value per share, normally $1.00, determined as of 4
p.m. on the first business day of each month.
Dividends are declared daily on each day on which the Exchange is open for
business. The dividends for a business day immediately preceding a weekend or
holiday will normally include an amount equal to the net income for the
subsequent days on which dividends are not declared. However, no daily dividend
will include any amount of net income in respect of a subsequent semiannual
accounting period.
Because the net investment income of STFMF is declared as a dividend each
time the net income of the Fund is determined, the net asset value per share of
the Fund (i.e., the fair value of the net assets of the Fund divided by the
number of shares of the Fund outstanding) will remain at $1.00 per share
immediately after each such determination and dividend declaration, unless (i)
there are unusual or extended fluctuations in short-term interest rates or other
factors, such as unfavorable changes in the creditworthiness of issuers
affecting the value of securities in the Fund's portfolio, or (ii) net
investment income is a negative amount.
Net investment income (from the time of the immediately preceding
determination thereof) consists of (i) all interest income accrued on the
portfolio assets of the Fund less (ii) all actual and accrued expenses. Interest
income included in the daily computation of net income is comprised of original
issue discount earned on discount paper accrued ratably to the date of maturity
as well as accrued interest. Expenses of STFMF, including the management fee
payable to the Adviser, are accrued each day.
Normally STFMF will have a positive net investment income at the time of
each determination thereof. Net investment income may be negative if an
unexpected liability must be accrued or a loss realized. If the net investment
income of STFMF determined at any time is a negative amount, the net asset value
per share will be reduced below $l.00 unless one or more of the following steps
are taken: the Trustees have the authority (l) to reduce the number of shares in
each shareholder's account, (2) to offset each shareholder's pro rata portion of
negative net investment income from the shareholder's accrued dividend account
or from future dividends, or (3) to combine these methods in order to seek to
maintain the net asset value per share at $l.00. STFMF may endeavor to restore
the net asset value per share to $l.00 by not declaring dividends from net
investment income on subsequent days until restoration, with the result that the
net asset value per share will increase to the extent of positive net investment
income which is not declared as a dividend.
Should STFMF incur or anticipate any unusual or unexpected significant
expense or loss which would affect disproportionately the Fund's income for a
particular period, the Trustees would at that time consider whether to adhere to
the dividend policy described above or to revise it in the light of the then
prevailing circumstances in order to ameliorate, to the extent possible, the
disproportionate effect of such expense, loss or depreciation on the then
existing shareholders. Such expenses or losses may nevertheless result in a
shareholder's receiving no dividends for the period during which the shares are
held and in receiving upon redemption a price per share lower than that which
was paid.
Distributions of realized capital gains, if any, are paid in November or
December of STFMF's taxable year although the Fund may make an additional
distribution within three months of the Fund's fiscal year end of December 31.
STFMF expects to follow the practice of distributing all net realized capital
gains to shareholders and expects to distribute realized capital gains at least
annually. However, if any realized capital gains are retained by STFMF for
reinvestment and federal income taxes are paid thereon by the Fund, the Fund
will elect to treat such capital gains as having been distributed to
shareholders; as a result, shareholders would be able to claim their share of
the taxes paid by the Fund on such gains as a credit against their individual
federal income tax liability.
<PAGE>
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free Fund,
Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund
SLTTFF, SMTTFF, SMMB and SHYTFF will follow the practice of distributing
substantially all of their net investment income (defined under "ADDITIONAL
INFORMATION--Glossary") and any excess of net realized short-term capital gains
over net realized long-term capital losses. In the past, SMTTFF, SMMB and SHYTFF
have followed the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However, if
it appears to be in the best interest of such Funds and the relevant
shareholders, such Fund may retain all or part of such gain for reinvestment.
Dividends on SLTTFF, SMTTFF, SMMB and SHYTFF will be declared daily and
distributions of net investment income will be made monthly on the fourth Boston
business day of each month for the preceding month's net income. Distributions
of realized capital gains, if any, are paid in November or December, although an
additional distribution may be made within three months of the Fund's fiscal
year end, if necessary, and each Fund expects to continue to distribute net
capital gains at least annually. Both types of distributions will be made in
shares of that Fund and confirmations will be mailed to each shareholder unless
a shareholder has elected to receive cash, in which case a check will be sent.
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Funds' prospectus.)
Scudder Tax Free Money Fund
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures may be calculated in the following manner:
Yield is the net annualized yield based on a specified 7-calendar day
period calculated at simple interest rates. Yield is calculated by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return. The yield is
annualized by multiplying the base period return by 365/7. The yield figure is
stated to the nearest hundredth of one percent. The yield of the Fund for the
seven-day period ended December 31, 1997 was ____%.
Effective Yield is the net annualized yield for a specified 7 calendar-day
period assuming a reinvestment of the income or compounding. Effective yield is
calculated by the same method as yield except the yield figure is compounded by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result, according to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1.
The effective yield of the Fund for the seven-day period ended December
31, 1997 was ____%.
Tax-Equivalent Yield is the net annualized taxable yield needed to produce
a specified tax-exempt yield at a given tax rate based on a specified 7-day
period assuming a reinvestment of all dividends paid during such period.
Tax-equivalent yield is calculated by dividing that portion of the Fund's yield
(as computed in the yield description in A. above) which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Fund that is not tax-exempt. Thus, taxpayers with effective
federal income tax rates of 36% and 39.6% would need to earn a taxable yield of
____% and ____%, respectively, to receive after-tax income equal to the ____%
tax-free yield of Scudder Tax Free Money Fund on December 31, 1997. Please refer
to the chart beginning below for a discussion of tax-exempt income v. taxable
income.
<PAGE>
As described above, yield, effective yield and tax-equivalent yield are
historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield, effective yield and,
tax-equivalent yield will vary based on changes in market conditions and the
level of the Fund's expenses.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to other unmanaged
indices which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
From time to time, in marketing pieces and other fund literature, the
Fund's yield and performance over time may be compared to the performance of
broad groups of comparable mutual funds, bank money market deposit accounts and
fixed-rate insured certificates of deposit (CDs), or unmanaged indices of
securities that are comparable to money market funds in their terms and intent,
such as Treasury bills, bankers' acceptances, negotiable order of withdrawal
accounts, and money market certificates. Most bank CDs differ from money market
funds in several ways: the interest rate is fixed for the term of the CD, there
are interest penalties for early withdrawal of the deposit, and the deposit
principal is insured by the FDIC.
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free Fund,
Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund
From time to time, quotation of each Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return is the average annual compound rate of return
for the periods of one year, five years and ten years (or such shorter periods
as may be applicable dating from the commencement of the Fund's operations) all
ended on the last day of a recent calendar quarter. If a Fund has been in
existence for less than ten years, the average annual total return for the life
of the Fund is given. Average annual total return quotations reflect changes in
the price of the Fund's shares and assume that all dividends and capital gains
distributions during the respective periods were reinvested in Fund shares.
Average annual total return is calculated by finding the average annual compound
rates of return of a hypothetical investment, over such periods, according to
the following formula (average annual total return is then expressed as a
percentage):
T = (ERV/P)1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
Average Annual Total Return for periods ended December 31, 1997
One Five Ten Life of
Year Years Years Fund
Scudder Medium Term Tax Free % % % %
Fund*
Scudder Managed Municipal
Bonds
Scudder High Yield Tax Free (1)
Fund**
<PAGE>
* The foregoing average annual total return for ten years includes the
period prior to November 1, 1990, during which the Fund operated under the
investment objective and policies of Scudder Tax Free Target Fund 1990
Portfolio. Average annual total return figures for the periods prior to
November 1, 1990 should not be considered representative of the present
Fund
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total returns would have been approximately _____.
(1) For the period beginning January 22, 1987 (commencement of operations).
Average Annual Total Return for period ended October 31, 1997
One Five Ten Life of
Year Years Years Fund
Scudder Limited Term Tax Free % %(1)
Fund*
* If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total return would have been approximately _____.
(1) For the period beginning February 15, 1994 (commencement of operations).
Cumulative Total Return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of a Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
Cumulative Total Return for periods ended December 31, 1997
One Five Ten Life of
Year Years Years Fund
Scudder Medium Term Tax Free % % %
Fund*
Scudder Managed Municipal
Bonds
Scudder High Yield Tax Free (2)
Fund**
* The foregoing cumulative total return for ten years includes the period
prior to November 1, 1990, during which the Fund operated under the
investment objective and policies of Scudder Tax Free Target Fund 1990
Portfolio. Cumulative total return figures for the periods prior to
November 1, 1990 should not be considered representative of the present
Fund.
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, cumulative total return would have been approximately
-----.
<PAGE>
(2) For the period beginning January 22, 1987 (commencement of operations).
Cumulative Total Return for period ended October 31, 1997
One Five Ten Life of
Year Years Years Fund
Scudder Limited Term Tax Free (1)
Fund*
* If the Adviser had not maintained Fund expenses and had imposed a full
management fee, cumulative total return would have been approximately
-----.
(1) For the period beginning February 15, 1994 (commencement of operations).
Total Return is the rate of return on an investment for a specified period
of time calculated in the same manner as Cumulative Total Return.
SEC Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Included in net
investment income is the amortization of market premium or accretion of market
and original issue discount. Yield, sometimes referred to as a Fund's "SEC
yield," is calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[(a-b/cd + 1)6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of expense
maintenance).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
Yields for the 30-day period ended December 31, 1997
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Yield for the 30-day period ended October 31, 1997
Scudder Limited Term Tax Free Fund
Tax-Equivalent Yield is the net annualized taxable yield needed to produce
a specified tax-exempt yield at a given tax rate based on a specified 30-day (or
one month) period assuming a reinvestment of all dividends paid during such
period (a method known as "semiannual compounding"). Tax-equivalent yield is
calculated by dividing that portion of the Fund's yield (as computed in the
yield description in D., above) which is tax-exempt by one minus a stated
Federal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
<PAGE>
Tax-Equivalent Yields as of December 31, 1997
TAXABLE EQUIVALENT*
28% 31% 36% 39.6%
FUND Tax Bracket Tax Bracket Tax Bracket Tax Bracket
Scudder Medium Term Tax
Free Fund
Scudder Managed Municipal
Bonds
Scudder High Yield Tax Free
Fund
* Based on federal income tax rates in effect for the 1997 taxable year.
Tax-Equivalent Yields as of October 31, 1997
TAXABLE EQUIVALENT*
28% 31% 36% 39.6%
FUND Tax Bracket Tax Bracket Tax Bracket Tax Bracket
Scudder Limited Term Tax
Free Fund ____% ____% ____% ____%
* Based on federal income tax rates in effect for the 1997 taxable year.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1997
calendar year.
1997 Taxable Federal To Equal Hypothetical Tax-Free Yields of
Income Brackets Tax Rates 5%, 7% and 9%, a Taxable Investment Would
Individual Have To Earn**
Return 5% 7% 9%
------ -- -- --
$0 - $23,350
$23,351- $56,550
$56,551 - $117,950
$117,951 - $256,500
Over $256,500
Joint TO BE UPDATED
Return
$0 - $39,000
$39,001 - $94,250
$94,251 - $143,600
$143,601 - $256,500
Over $256,500
<PAGE>
** These illustrations assume the Federal alternative minimum tax is not
applicable, that an individual is not a "head of household" and claims one
exemption and that taxpayers filing a joint return claim two exemptions.
Note also that these federal income tax brackets and rates do not take
into account the effects of (i) a reduction in the deductibility of
itemized deductions for taxpayers whose federal adjusted gross income
exceeds $114,700 ($57,350 in the case of a married individual filing a
separate return), or of (ii) the gradual phaseout of the personal
exemption amount for taxpayers whose federal adjusted gross income exceeds
$114,700 (for single individuals) or $172,050 (for married individuals
filing jointly). The effective federal tax rates and equivalent yields
for such taxpayers would be higher than those shown above.
Example: *
Based on 1997 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $40,000 would have to earn a
tax-equivalent yield of ____% in order to match a tax-free yield of 5%.
There is no guarantee that a fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and exemptions,
exclusive of the alternative minimum tax.
As described above, average annual total return, cumulative total return,
total return, yield, and tax-equivalent yield are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Average annual total return, cumulative total return, total return,
yield, and tax-equivalent yield for a Fund will vary based on changes in market
conditions and the level of a Fund's expenses.
Investors should be aware that the principal of each Fund is not insured.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Examples include, but are not limited to the Dow Jones Industrial Average, the
Consumer Price Index, Standard & Poor's 500 Composite Stock Price Index (S&P
500), the NASDAQ OTC Composite Index, the NASDAQ Industrials Index, the Russell
2000 Index, and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
<PAGE>
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder Family of Funds or broad categories of funds, such as money
market, bond or equity funds, in terms of potential risks and returns. Money
market funds are designed to maintain a constant $1.00 share price and have a
fluctuating yield. Share price, yield and total return of a bond fund will
fluctuate. The share price and return of an equity fund also will fluctuate. The
description may also compare the Funds to bank products, such as certificates of
deposit. Unlike mutual funds, certificates of deposit are insured up to $100,000
by the U.S. government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Funds, including reprints of, or selections from, editorials or articles about
these Funds. Sources for Fund performance information and articles about the
Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
<PAGE>
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
<PAGE>
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
Scudder Tax Free Money Fund is a Massachusetts business trust established
under a Declaration of Trust dated October 5, 1979, as amended. Scudder Medium
Term Tax Free Fund is a series of Scudder Tax Free Trust, a Massachusetts
business trust established under a Declaration of Trust dated December 28, 1982,
as amended. Scudder Limited Term Tax Free Fund is the other series of the Trust.
The name and investment objectives of SMTTFF were changed effective November 1,
1990. Scudder Municipal Trust is a Massachusetts business trust established
under a Declaration of Trust dated September 24, 1976, as amended. The Trustees
of Scudder Municipal Trust have established and designated two series of the
Trust: Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund.
Each Fund's authorized capital consists of an unlimited number of shares of
beneficial interest, $.01 par value. All shares of each Fund issued and
outstanding will be fully paid and non-assessable by the Funds, and redeemable
as described in this Statement of Additional Information.
All shares of STFMF and STFT are of one class and have equal rights as to
voting, dividends and liquidation. The Trustees of STFMF and STFT have the
authority to issue two or more series of shares and to designate the relative
rights and preferences as between the different series. The Trustees of STFMF
have not yet exercised that authority. If more than one series of shares were
issued and a series were unable to meet its obligations, the remaining series
might have to assume the unsatisfied obligations of that series. All shares
issued and outstanding will be fully paid and non-assessable by the Funds and
redeemable as described in this Statement of Additional Information and in the
Funds' prospectus.
<PAGE>
The shares of SMT are issued in separate series, each share of which
represents an equal proportionate interest in that series with each other share
of that series. The Trustees of SMT have the authority to designate additional
series and to designate the relative rights and preferences as between the
different series.
The Trustees of STFMF and SMT, in their discretion, may authorize the
division of shares of each of their respective Funds (or shares of a series)
into different classes permitting shares of different classes to be distributed
by different methods. Although shareholders of different classes of a series
would have an interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution. The Trustees have no present intention of taking the
action necessary to effect the division of shares into separate classes (which
under present regulations would require the Funds first to obtain an exemptive
order of the SEC), nor of changing the method of distribution of shares of the
Funds.
Currently, the assets of SMT and STFT received for the issue or sale of
the shares of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such series and constitute the underlying assets of such series. The underlying
assets of each series are segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a share of the
general liabilities of SMT. If a series were unable to meet its obligations, the
assets of all other series may in some circumstances be available to creditors
for that purpose, in which case the assets of such other series could be used to
meet liabilities which are not otherwise properly chargeable to them. Expenses
with respect to any two or more series are to be allocated in proportion to the
asset value of the respective series except where allocations of direct expenses
can otherwise be fairly made. The officers of SMT and STFT, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given series, or which are general or allocable
to two or more series. In the event of the dissolution or liquidation of SMT and
STFT, the holders of the shares of any series are entitled to receive as a class
the underlying assets of such shares available for distribution to shareholders.
Shares of SMT and STFT entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
Each Fund's Declaration of Trust provides that obligations of the Fund
involved are not binding upon the Trustees individually but only upon the
property of that Fund, that the Trustees and officers will not be liable for
errors of judgment or mistakes of fact or law, and that the Fund involved will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Fund except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Fund involved.
However, nothing in the Declarations of Trust protect or indemnify a Trustee or
officer against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
INVESTMENT ADVISER
(See "Fund organization--Investment adviser" in the Funds' prospectus.)
<PAGE>
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Adviser's predecessor entered into an agreement with
Zurich Insurance Company ("Zurich") pursuant to which the predecessor and Zurich
agreed to form an alliance. On December 31, 1997, Zurich acquired a majority
interest in Scudder, and Zurich made its subsidiary Zurich Kemper Investments,
Inc., a part of the predecessor organization. The predecessor's name has been
changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Adviser's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today, it provides investment counsel
for many individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Scudder Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds,
Inc., Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder
Pathway Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil
Fund, Inc., Scudder Spain and Portugal Fund, Inc., Scudder Global High Income
Fund, Inc., The Korea Fund, Inc. and The Japan Fund, Inc. Some of the foregoing
companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual funds
which comprise the AARP Investment Program from Scudder. The AARP Investment
Program from Scudder has assets over $12 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.
The Adviser maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. The Adviser receives published reports and
statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. In selecting the securities in which
the Funds may invest, the conclusions and investment decisions of the Adviser
with respect to the Funds are based primarily on the analyses of its own
research department.
Certain investments may be appropriate for more than one of the Funds (or
more than one series of SMT and STFT) and also for other clients advised by the
Adviser, in particular the other Scudder tax free funds. Investment decisions
for the Funds and other clients are made with a view to achieving their
respective investment objectives and after consideration of such factors as
their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the Adviser to be equitable
to each. In some cases, this procedure could have an adverse effect on the price
or amount of the securities purchased or sold by a Fund. Purchase and sale
orders for a Fund may be combined with those of other clients of the Adviser in
the interest of achieving the most favorable net results to the Funds.
<PAGE>
Under the Agreements, the Adviser regularly provides the Funds with
continuing investment management consistent with each Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for each Fund, what securities shall be held or sold by each Fund, and
what portion of each Fund's assets shall be held uninvested, subject always to
the provisions of each Fund's Declaration of Trust and By-Laws, of the 1940 Act
and the Internal Revenue Code of 1986 and to each Fund's investment objectives,
policies and restrictions, and subject further to such policies and instructions
as the Trustees of each Fund may from time to time establish. The Adviser also
advises and assists the officers of each Fund in taking such steps as are
necessary or appropriate to carry out the decisions of its Trustees and the
appropriate committees of the Trustees regarding the conduct of the business of
the Funds.
Under the Agreements, the Adviser also renders significant administrative
services (not otherwise provided by third parties) necessary for the Funds'
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Funds (such as the Funds' transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Funds' federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Funds under applicable
federal and state securities laws; maintaining the Funds' books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Funds; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Funds' operating budget;
processing the payment of the Funds' bills; assisting the Funds in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting the Funds in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses (except expenses incurred
in attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all Trustees and executive employees of each Fund affiliated
with the Adviser and makes available, without expense to the Funds, the services
of such trustees, officers and employees of the Adviser as may duly be elected
Trustees of the Funds, subject to their individual consent to serve and to any
limitations imposed by law, and provides each Fund's office space and
facilities.
For the above services STFMF pays a fee of 0.50 of 1% of the first $500
million of average daily net assets and 0.48 of 1% of such net assets over $500
million, payable monthly, provided the Fund will make such interim payments as
may be requested by the Adviser not to exceed 75% of the amount of the fee then
accrued on the books of the Fund and unpaid.
For the years ended December 31, 1995, 1996 and 1997, STFMF's investment
advisory fees pursuant to its investment advisory agreement with Scudder
amounted to $1,197,027, $1,030,755 and $___________, respectively.
For the above services, SLTTFF pays the Adviser a monthly fee of 0.60% of
the average daily net assets of the Fund. The Agreement provides that if the
Fund's expenses, exclusive of taxes, interest, and extraordinary expenses,
exceed specified limits, such excess, up to the amount of the management fee,
will be paid by the Adviser. The Adviser retains the ability to be repaid by the
Fund if expenses fall below the specified limit prior to the end of the fiscal
year. These expense limitation arrangements can decrease the Fund's expenses and
improve its performance. For the year ended October 31, 1997, the Adviser did
not impose a portion of its fee amounting to $_______ and the fee imposed
aggregated $_______, all of which is unpaid at October 31, 1997.
For the period September 1, 1995 to April 30, 1997, the Adviser agreed to
maintain the annualized expenses at 0.50% of average daily net assets. Effective
December 31, 1996, the Adviser agreed to maintain the annualized expenses at
0.75% of average daily net assets until December 31, 1997.
For the above services SMTTFF pays a monthly fee of 0.60 of 1% of the
first $500 million of average daily net assets and 0.50 of 1% of such assets in
excess of $500 million on an annual basis.
<PAGE>
For the years ended December 31, 1995, 1996 and 1997, SMTTFF's fees
pursuant to such Agreement amounted to $4,083,050, $3,879,293 and $_______,
respectively. For the years ended December 31, 1995, 1996 and 1997, SMTTFF's
aggregate fees pursuant to such Agreement amounted to $4,083,050, $3,879,293 and
$__________, respectively; however, the Adviser did not impose $174,121,
$_________ and $_________ of the fees charged in 1995, 1996 and 1997,
respectively.
For the above services SMMB pays a monthly fee of 0.55 of 1% on the first
$200 million of average daily net assets and 0.50 of 1% on the next $500 million
and 0.475 of 1% of average daily net assets in excess of $700 million, payable
monthly, provided the Fund will make such interim payments as may be requested
by the Adviser not to exceed 75% of the amount of the fee then accrued on the
books of the Fund and unpaid.
For the years ended December 31, 1995, 1996 and 1997, aggregate fees
incurred by SMMB pursuant to its investment advisory agreement amounted to
$3,837,608, $3,826,131 and $________, respectively.
For the above services SHYTFF pays monthly a fee of 0.70 of 1% on the
first $200 million of average daily net assets and 0.65 of 1% on such net assets
in excess of $200 million, payable monthly, provided the Fund will make such
interim payments as may be requested by the Adviser not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid.
The Adviser agreed not to impose all or a portion of its investment
advisory fee with respect to SHYTFF in order to maintain the annualized expenses
of the Fund at not more than 0.80% of average daily net assets of the Fund until
April 30, 1997. For the years ended December 31, 1995, 1996 and 1997, fees
incurred by SHYTFF amounted to $1,552,159, $1,885,083 and $_________,
respectively. For the years ended December 31, 1995, 1996 and 1997 the Adviser
did not impose a fee which would have amounted to $415,870, $121,432 and
$_________, respectively.
Legal counsel has advised the Fund that for completed fiscal periods the
Adviser would have been liable for failure to comply with the terms of a
publicly announced expense limitation.
Under the Agreements, each Fund is responsible for all of its other
expenses, including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; taxes and governmental fees; the fees and expenses of the
Transfer Agent; the cost of preparing share certificates and any other expenses,
including clerical expenses, of issuance, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees,
officers and employees of the Funds who are not affiliated with the Adviser; the
cost of printing and distributing reports and notices to shareholders; and the
fees and disbursements of custodians. Each Fund may arrange to have third
parties assume all or part of the expenses of sale, underwriting and
distribution of shares of such Fund. Each Fund is also responsible for expenses
of shareholders' meetings and expenses incurred in connection with litigation,
proceedings and claims and the legal obligation it may have to indemnify its
officers and Trustees with respect thereto.
The expense ratios for STFMF for the years ended December 31, 1995, 1996
and 1997 were 0.75%, 0.70% and _____%, respectively. The expense ratio for
SLTTFF for the years ended October 31, 1995, 1996 and 1997 were .23%,.63% and
____%, respectively. The expense ratios for SMTTFF for the years ended December
31, 1995, 1996 and 1997 were 0.70%, 0.72% and ____%, respectively. If expense
maintenance had not been in effect, total annualized Fund operating expenses for
SMTTFF for the years ended December 31, 1995, 1996 and 1997 would have been
0.72%, 0.72% and _____% of average daily net assets, respectively. The expense
ratios of SMMB for the years ended December 31, 1995, 1996 and 1997 were 0.63%,
0.63% and ____%, respectively. Since the Adviser maintained Fund expenses as
described above, the expense ratios for SHYTFF were0.80%, 0.91% and ____% for
the years ended December 31, 1995, 1996 and 1997, respectively. If expense
maintenance had not been in effect, total annualized Fund operating expenses for
SHYTFF for the years ended December 31, 1995, 1996 and 1997 would have been
0.94%, 0.95% and ____% of average daily net assets, respectively. Any such fee
advance required to be returned to a Fund will be returned as promptly as
practicable after the end of the Fund's fiscal year. However, no fee payment
will be made to the Adviser during any fiscal year which will cause year-to-date
expenses to exceed the cumulative pro rata expense limitation at the time of
such payment. The amortization of organizational costs is described herein under
"ADDITIONAL INFORMATION--Other Information."
<PAGE>
Because the transaction between Scudder and Zurich resulted in the
assignment of the Funds' investment management agreements with Scudder, the
agreements were deemed to be automatically terminated at the consummation of the
transaction. In anticipation of the transaction, however, new investment
management agreements between the Funds and the Adviser were approved by the
Funds' Trustees. At the special meeting of the Funds' shareholders held on
October 24, 1997, the shareholders also approved proposed new investment
management agreements. The new investment management agreements (the
"Agreements") will become effective as of December 31, 1997 and will be in
effect for an initial term ending on September 30, 1998. The Agreements are in
all material respects on the same terms as the previous investment management
agreements which they supersede. The Agreements incorporate conforming changes
which promote consistency among all of the funds advised by the Adviser and
which permit ease of administration.
The Agreement for SLTTFF is datedDecember 31, 1997. The Agreement will
remain in effect until September 30, 1998, and will continue in effect from year
to year thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or "interested
persons" of the Adviser or the Trust cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding voting securities of the Fund. The
Agreement was approved by such Trustees (including a majority of the Trustees
who are not such "interested persons") on ____________, 1997 and by the Fund's
shareowners on October __, 1997. The Agreement may be terminated at any time
without payment of penalty by either party on sixty days' written notice, and
automatically terminates in the event of its assignment.
The Agreements of STFMF and SHYTFF, dated December 31, 1997, will remain
in effect as to each Fund until September 30, 1998. Those Agreements and the
Agreements of SMMB and SMTTFF dated December 31, 1997, will continue in effect
from year to year thereafter only if its continuance is approved annually by the
vote of a majority of those Trustees of each Fund who are not parties to such
Agreement or "interested persons" of the Adviser or the Fund involved cast in
person at a meeting called for the purpose of voting on such approval and either
by vote of a majority of the Trustees or a majority of the outstanding voting
securities of such Fund. The Agreements of STFMF and SHYTFF were last approved,
and the Agreements of SMMB and SMTTF were last approved, by such Trustees
(including a majority of the Trustees who are not such "interested persons") on
________________, 1997. The Agreements may be terminated at any time without
payment of penalty by either party or sixty days' written notice, and each
automatically terminates in the even of its assignment.
The Agreements identify the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens & Clark, Inc." (together, the "Scudder Marks"). Under
this license, each Trust, with respect to a Fund, has the non-exclusive right to
use and sublicense the Scudder name and marks as part of its name, and to use
the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreements and in discussions with Scudder
Kemper Investments, Inc. concerning the Agreements, Trustees who are not
"interested persons" of the Adviser are represented by independent counsel at
each Fund's expense.
The Agreements provide that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by one of the Funds in
connection with matters to which the Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
<PAGE>
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.
None of the Trustees or Officers of a Fund may have dealings with that
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
TRUSTEES AND OFFICERS
Position with
Underwriter,
Name, Position Principal Scudder Investor
Age and Address with Trust Occupation** Services, Inc.
Henry P. Becton, Jr. (54) Trustee President and General --
WGBH (1,2,3) Manager, WGBH
125 Western Ave. Educational Foundation
Boston, MA 02134
Dawn-Marie Driscoll (51) Trustee Attorney and Corporate --
Driscoll Associates (1,2,3) Director; former
4909 SW 9th Place Partner, Palmer &
Cape Coral, FL 33914 Dodge, law firm
(1988-1990)
Peter B. Freeman (65) Trustee Corporate Director and --
100 Alumni Avenue (1,2,3) Trustee
Providence, RI 02906
George M. Lovejoy, Jr. Trustee President and Former --
(68) (1,2,3) Director, Fifty
160 Federal Street Associates (Real
Boston, MA 02110 estate corporation)
Wesley W. Marple, Jr. Trustee Professor of Business --
(66) (1,2,3) Administration,
Northeastern University Northeastern
413 Hayden Hall University, College of
360 Huntington Avenue Business
Boston, MA 02115 Administration
Kathryn L. Quirk*# (45) Vice Managing Director of Senior Vice
President, Scudder Kemper President,
Trustee and Investments, Inc. Director and
Assistant Clerk
Secretary
(1,2,3)
Jean C. Tempel (55) Trustee Managing Partner, --
TL Ventures (1,2,3) Technology Equity
10 Post Office Square Partners
Suite 1325
Boston, MA 02109-4603
Daniel Pierce*+ (64) Trustee and Chairman of the Board Vice President,
Vice and Managing Director Director and
President (1) of Scudder Kemper Assistant
Investments, Inc. Treasurer
Donald C. Carleton+ (63) Vice Managing Director of --
President Scudder Kemper
(1,2,3) Investments, Inc.
Philip G. Condon+ (47) Vice Managing Director of Senior Vice
President (1) Scudder Kemper President and
Investments, Inc. Director
K. Sue Cote+ (37) Vice Principal of Scudder --
President (2) Kemper Investments,
Inc.
Jerard K. Hartman# (65) Vice Managing Director of --
President Scudder Kemper
(1,2,3) Investments, Inc.
Thomas W. Joseph+ (59) Vice Principal of Scudder Vice President,
President Kemper Investments, Director,
(1,2,3) Inc. Treasurer and
Assistant Clerk
M. Ashton Patton (34) Vice Vice President of --
President (3) Scudder Kemper
Investments, Inc.
Thomas F. McDonough+ (51) Vice Principal of Scudder Assistant Clerk
President and Kemper Investments,
Secretary Inc.
(1,2,3)
Caroline Pearson+ (35) Assistant Vice President of --
Secretary Scudder Kemper
Investments, Inc.
(1) SMT
(2) STFMF
(3) STFT
* Mr. Pierce and Ms. Quirk are considered by the Funds and their counsel to
be Trustees who are "interested persons" of the Adviser or of the Fund,
within the meaning of the 1940 Act.
** Unless otherwise stated, all Trustees and Officers have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
Mr. Pierce and Ms. Quirk are members of the Executive Committee of STFMF,
Ms. Tempel, Ms. Quirk and Mr. Freeman are members of the Executive Committee of
STFT, and Messrs. Lovejoy, Marple and Pierce are members of the Executive
Committee of SMT. Each Committee has the power to declare dividends from
ordinary income and distributions of realized capital gains to the same extent
as its Board is so empowered.
As of____________, 1997, all Trustees and officers of STFMF as a group
owned beneficially (as that term is defined under Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")) less than 1% of the shares
of the Fund.
Certain accounts for which the Adviser acts as investment adviser owned
____________ shares in the aggregate, or _____% of the outstanding shares of
STFMF on____________, 1997. The Adviser may be deemed to be the beneficial owner
of such shares but disclaims any beneficial ownership in such shares.
To the knowledge of STFMF, as of _____________, 1997, no person owned
beneficially more than 5% of the Fund's outstanding shares, except as stated
above.
As of _______________, 1997, all Trustees and officers of STFT as a group
owned beneficially (as that term is defined in Section 13(d) under the Exchange
Act) less than 1% of SMTTFF.
Certain accounts for which the Adviser acts as investment adviser owned
__________ shares in the aggregate, or _____% of the outstanding shares of
SMTTFF on ____________, 1997. The Adviser may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
As of ____________, 1997, ______________ shares in the aggregate, ____% of
the outstanding shares of SMTTFF, were held in the name of Charles Schwab & Co.,
101 Montgomery Street, San Francisco, CA 94104, who may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the knowledge of STFT, as of ______________, 1997, no person owned
beneficially more than 5% of SMTTFF's outstanding shares except as stated above.
As of ___________, 1997, all Trustees and officers of SMT as a group owned
beneficially (as that term is defined under Section 13(d) of the Exchange Act)
less than 1% of the shares of SMMB.
Certain accounts for which the Adviser acts as investment adviser owned
_____________ shares in the aggregate, or ___% of the outstanding shares of SMMB
on ______________, 1997. The Adviser may be deemed to be the beneficial owner of
such shares but disclaims any beneficial interest in such shares.
As of _____________, 1997, ____________ shares in the aggregate, ____% of
the outstanding shares of SMMB, were held in the nominees of Fiduciary Trust
Company. Fiduciary Trust Company may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
To the knowledge of SMT, as of _____________, 1997, no person owned
beneficially more than 5% of SMMB's outstanding shares except as stated above.
As of _____________, 1997, all Trustees and Officers of SMT as a group
owned beneficially (as that term is defined under Section 13(d) of the Exchange
Act) less than 1% of the shares of SHYTFF.
To the knowledge of SMT, as of _____________, 1997, no person owned
beneficially more than 5% of SHYTFF's outstanding shares.
The Trustees and Officers of STFMF, STFT and SMT also serve in similar
capacities with other Scudder funds.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Funds' business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. (the "Adviser"). These "Independent Trustees"
have primary responsibility for assuring that the Funds are managed in the best
interests of their shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Funds and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Funds' investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Funds' independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
The Independent Trustees of SLTTFF met ______ times during 1997, including
Board and Committee meetings and meetings to review the Fund's contractual
arrangements as described above.
The Independent Trustees of SMTTFF met _______ times during 1997,
including Board and Committee meetings and meetings to review the Fund's
contractual arrangements as described above.
The Independent Trustees of STFMF met ________ times during 1997,
including Board and Committee meetings and meetings to review the Fund's
contractual arrangements as described above.
The Independent Trustees of SMMB and SHYTFF met ________ times during
1997, including Board and Committee meetings and meetings to review the Fund's
contractual arrangements as described above.
Compensation of Officers and Trustees
Each of the Independent Trustees receive the following compensation from
the Funds: an annual trustee's fee of $4,000; a fee of $300 for attendance at
each Board meeting, audit committee meeting, or other meeting held for the
purposes of considering arrangements between the Funds and the Adviser or any
affiliate of the Adviser; $100 for any other committee meeting (although in some
cases the Independent Trustees have waived committee meeting fees); and
reimbursement of expenses incurred for travel to and from Board Meetings. No
additional compensation is paid to any Independent Trustee for travel time to
meetings, attendance at directors' educational seminars or conferences, service
on industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Trustees do not receive any employee
benefits such as pension, retirement or health insurance.
The Independent Trustees also serve in the same capacity for other funds
managed by the Adviser. These funds differ broadly in type an complexity and in
some cases have substantially different Trustee fee schedules. The following
table shows the aggregate compensation received by each Independent Trustee
during 1997 from the Trusts and from all of Scudder funds as a group.
Scudder Scudder Tax Scudder Tax
Name Municipal Free Trust** Free Money All Scudder Funds
Trust* Fund
Henry P. Becton,
Jr.,
Trustee
Dawn-Marie
Driscoll,
Trustee
Peter B. Freeman,
Trustee
George M.
Lovejoy, Jr.,
Trustee
Wesley W. Marple,
Jr.,
Trustee
Jean C. Tempel,
Trustee
* Scudder Municipal Trust consists of two Funds: Scudder Managed Municipal
Bonds and Scudder High Yield Tax Free Fund
**Scudder Tax Free Trust consists of two Funds: Scudder Medium Term Tax Free
Fund and Scudder Limited Term Tax Free Fund
Members of the Board of Trustees who are employees of the Adviser or its
affiliates receive no direct compensation from the Trusts, although they are
compensated as employees of the Adviser, or its affiliates as a result of which
they may be deemed to participate in fees paid by each Fund.
<PAGE>
DISTRIBUTOR
Each Fund has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a subsidiary of
the Adviser, a Delaware corporation. The underwriting agreements of STFMF,
SLTTFF, SMTTFF, SMMB and SHYTFF each dated September 10, 1985, July 15, 1985,
January 12, 1987 and January 12, 1987, respectively, will remain in effect until
September 30, 1998 and from year to year thereafter only if its continuance is
approved annually by a majority of the Trustees who are not parties to such
agreement or "interested persons" of any such party and by a vote either of a
majority of the Trustees or a majority of the outstanding voting securities of
the relevant Fund. The underwriting agreement of each Fund was last approved by
the Trustees on ______________, 1997.
Under the underwriting agreements, each Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering a Fund as a broker/dealer in various
states, as required; the fees and expenses of preparing, printing and mailing
prospectuses annually to existing shareholders (see below for expenses relating
to prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications to shareholders of that Fund; the cost of printing and
mailing confirmations of purchases of shares and any prospectuses accompanying
such confirmations; any issuance taxes and/or any initial transfer taxes; a
portion of shareholder toll-free telephone charges and expenses of shareholder
service representatives; the cost of wiring funds for share purchases and
redemptions (unless paid by the shareholder who initiates the transaction); the
cost of printing and postage of business reply envelopes; and a portion of the
cost of computer terminals used by both that Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of each Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by that Fund, unless a rule 12b-1 plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although each Fund does not currently have a 12b-1 Plan, and the Trustees
have no current intention of adopting one, the Fund would also pay those
fees and expenses permitted to be paid or assumed by that Fund pursuant to
a 12b-1 Plan, if any, were such a plan adopted by the Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement.
As agent, the Distributor currently offers shares of each Fund and
Portfolio on a continuous basis to investors in all states in which the Fund may
from time to time be registered or where permitted by applicable law. Each
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of any Fund.
<PAGE>
TAXES
(See "Transaction information--Tax information, Tax identification number"
and "Distribution and performance information" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in the Statement of Additional Information
in light of their particular tax situation.
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and has qualified as such. Each of the Funds intends to continue to so qualify,
in each taxable year as required under the Code in order to avoid payment of
federal income tax at the Fund level.
In order to qualify as a regulated investment company, each Fund must meet
certain requirements regarding the source of its income and the diversification
of its assets and must also derive less than 30% of its gross income in each
taxable year from certain types of investments (such as securities, options and
financial futures) held for less than three months. Legislation currently
pending before the U.S. Congress would repeal this requirement. However, it is
impossible to predict whether this legislation will become law and, if it is so
enacted, what form it will eventually take.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income and net short-term capital gain in
excess of net long-term capital loss and at least 90 percent of its tax-exempt
net investment income and generally is not subject to federal income tax to the
extent that it distributes annually all of its taxable net investment income and
net realized long-term and short-term capital gains in the manner required under
the Code. Each of the Funds intends to distribute annually all taxable and
tax-exempt net investment income and net realized capital gains in compliance
with applicable distribution requirements and therefore do not expect to pay
federal income tax.
Each of the Funds is subject to a 4% nondeductible excise tax on amounts
of taxable income required to be but not distributed under a prescribed formula.
The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of such Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year as well as amounts that were neither distributed nor taxed to the Fund
during the prior calendar year. (Investment companies with taxable years ending
on November 30 or December 31 may make an irrevocable election to measure the
required capital gain distribution using their actual taxable year.) Although
the Funds' distribution policies should enable them to avoid excise tax
liability, each Fund may retain (and be subject to income or excise tax on) a
portion of its capital gain or other income if it appears to be in the best
interest of such Fund and its shareholders.
Net investment income is made up of dividends and interest, less expenses.
Net realized capital gains for a fiscal year are computed by taking into account
any capital loss carryforward or post-October loss of a Fund. SLTTFF, STFMF,
SHYTFF and SMMB intend to offset realized capital gains by using their capital
loss carryforwards before distributing any capital gains. In addition, SHYTFF
and SMMB intend to offset realized capital gains by using their post-October
losses before distributing any capital gains. As of December 31, 1996, STFMF had
a net capital loss carryforward of approximately $696,000, which may be applied
against realized capital gains of each succeeding year until fully utilized or
until December 31, 2000 ($7,000), December 31, 2001 ($29,000), December 31, 2002
($38,000), December 31, 2003 ($78,000) and December 31, 2004 ($544,000), the
respective expiration dates, whichever occurs first. As of December 31, 1996,
SHYTFF had a net capital loss carryforward of approximately $6,242,000, which
may be applied against realized capital gains of each succeeding year until
fully utilized or until December 31, 2002, the expiration date, whichever occurs
first. As of December 31, 1996, SMMB had a net capital loss carryforward of
approximately $985,000, which may be applied against realized capital gains of
each succeeding year until fully utilized or until December 31, 2002, the
expiration date, whichever occurs first.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by STFT, SMMB or SHYTFF for reinvestment,
requiring federal income taxes to be paid thereon, the Fund involved will elect
to treat such capital gains as having been distributed to its shareholders. As a
result, shareholders will report such capital gains as long-term capital gains,
will be able to claim their share of federal income taxes paid by that Fund on
such gains as a credit against their own federal income tax liability, and will
be entitled to increase the adjusted tax basis of their Fund shares by the
difference between a pro rata share of such gains and their individual tax
credit.
<PAGE>
Properly designated distributions of taxable net investment income and the
excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow-through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of the taxable year is invested in state,
municipal and other obligations the interest on which is exempt under Section
103(a) of the Code. Each of the Funds intends to satisfy this 50% requirement in
order to permit distributions of tax-exempt interest to be treated as such for
federal income tax purposes in the hands of their shareholders. Distributions to
shareholders of tax-exempt interest earned by such Funds for the taxable year
are therefore not subject to regular federal income tax, although they may be
subject to the individual and corporate alternative minimum taxes described
below. Discount from certain stripped tax-exempt obligations or their coupons,
however, may be taxable.
The Revenue Reconciliation Act of 1993 requires that any market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds purchased after April 30, 1993. A market discount
bond is a bond acquired in the secondary market at a price below its redemption
value. Under prior law, the treatment of market discount as ordinary income did
not apply to tax-exempt obligations. Instead, realized market discount on
tax-exempt obligations was treated as capital gain. Under the new law, gain on
the disposition of a tax-exempt obligation or any other market discount bond
that is acquired for a price less than its principal amount will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount. This rule is effective only for bonds purchased after April 30, 1993.
Since no portion of the income of each of the Funds will be comprised of
dividends from domestic corporations, none of the income distributions of the
Funds will be eligible for the 70% deduction for dividends received from a Fund
by its corporate shareholders.
Properly designated distributions of the excess of net long-term capital
gain over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund involved
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction to corporate shareholders of the Funds. Any loss
realized upon the redemption of shares of STFT, SMMB or SHYTFF within six months
from the date of their purchase will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Any short-term capital loss realized upon the
redemption of shares of STFT, SMMB or SHYTFF within six months from the date of
their purchase will be disallowed to the extent of any tax-exempt dividends
received with respect to such shares. Any loss realized on the redemption of
shares of one of such Funds may be disallowed if shares of the same Fund are
purchased (including shares purchased under the dividend investment plan or the
automatic reinvestment plan) within 30 days before or after such redemption.
Distributions derived from interest which is exempt from regular federal
income tax may subject corporate shareholders to or increase their liability
under the 20% alternative minimum tax. A portion of such distributions may
constitute a tax preference item for individual shareholders and may subject
them to or increase their liability under the 26% and 28% alternative minimum
tax.
<PAGE>
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the federal income tax status of all distributions,
including a statement of the percentage of the prior calendar year's
distributions which were designated as tax-exempt, the percentage of such
tax-exempt distributions treated as a tax-preference item for purposes of the
alternative minimum tax, and the source of such distributions on a
state-by-state basis. All distributions of taxable or tax-exempt net investment
income and net realized capital gain, whether received in shares or in cash,
must be reported by each shareholder on his or her federal income tax return.
Dividends and distributions declared in October, November or December to
shareholders as of a record date in such a month will be deemed to have been
received by shareholders in December if paid during January of the following
year. Redemptions of shares, except shares of STFMF, including exchanges for
shares of another Scudder fund, may result in tax consequences (gain or loss) to
the shareholder and are also subject to these reporting requirements.
Investors should consider the tax implications of buying shares just prior
to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them (to the extent that
such distribution is from taxable income or gain).
All futures contracts entered into by STFT, SMMB or SHYTFF, and all
options on futures contracts written or purchased by them will be governed by
Section 1256 of the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such position
generally will be treated as 60% long-term and 40% short-term capital gain or
loss, and on the last trading day of the fiscal year, all outstanding Section
1256 positions will be marked to market (i.e. treated as if such positions were
closed out at their closing price on such day), with any resulting gain or loss
recognized as 60% long-term and 40% short-term capital gain or loss. Under
certain circumstances, entry into a futures contract to sell a security may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of the underlying security or a substantially identical
security owned by such Fund.
Positions of STFT, SMMB or SHYTFF, which consist of at least one debt
security not governed by Section 1256 and at least one futures contract or
option on a futures contract governed by Section 1256 which substantially
diminishes the risk of loss with respect to such debt security, will be treated
as a "mixed straddle." Although mixed straddles are subject to the straddle
rules of Section 1092 of the Code, the operation of which may cause deferral of
losses, adjustments in the holding periods of securities and conversion of
short-term capital losses into long-term capital losses, certain tax elections
exist for them which reduce or eliminate the operation of these rules. SMTTFF,
SMMB and SHYTFF will monitor their transactions in options and futures and may
make certain tax elections in order to mitigate the operation of these rules and
prevent their disqualification as regulated investment companies for federal
income tax purposes.
Under the federal income tax law, each Fund will be required to report to
the Internal Revenue Service all distributions of taxable income and capital
gains and, in the case of SLTTFF, SMTTFF, SMMB and SHYTFF, gross proceeds from
the redemption or exchange of shares, except in the case of certain exempt
shareholders. Under the "backup withholding" tax provisions of Section 3406 of
the Code, distributions of taxable income and capital gains and proceeds from
the redemption or exchange of shares are generally subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish a regulated investment company with their taxpayer
identification numbers and with their required certifications regarding their
status under the federal income tax law. Under a special exception,
distributions of taxable income and capital gains of each Fund will not be
subject to backup withholding if each reasonably estimates that at least 95% of
all such distributions will consist of tax-exempt interest dividends. However,
the proceeds from the redemption or exchange of shares of SLTTFF, SMTTFF, SMMB
and SHYTFF may be subject to backup withholding. If the withholding provisions
are applicable, any such distributions and proceeds, whether distributed in cash
or reinvested in additional shares, will be reduced by the amounts required to
be withheld.
<PAGE>
Interest on indebtedness incurred by shareholders to purchase or carry
shares of each Fund will not be deductible for federal income tax purposes.
Under rules used by the Internal Revenue Service to determine when borrowed
funds are used for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of interest
on certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed by such obligations. The Funds
have not undertaken any investigation as to the users of the facilities financed
by bonds in their portfolios.
Tax legislation in recent years has included several provisions that may
affect the supply of, and the demand for, tax-exempt bonds, as well as the
tax-exempt nature of interest paid thereon.
It is not possible to predict with certainty the effect of these recent
tax law changes upon the tax-exempt bond market, including the availability of
obligations appropriate for investment, nor is it possible to predict any
additional restrictions that may be enacted in the future. Each Fund will
monitor developments in this area and consider whether changes in its objectives
or policies are desirable.
Shareholders may be subject to state and local taxes on distributions from
each Fund and redemptions of the shares of each Fund. Some states exempt from
the state personal income tax distributions received from a regulated investment
company to the extent such distributions are derived from interest on
obligations issued by such state or its municipalities or political
subdivisions.
Each Fund is organized as a Massachusetts business trust or a series of
such trust and is not liable for any income or franchise tax in The Commonwealth
of Massachusetts provided that each qualifies as a regulated investment company
under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under an applicable income
tax treaty) on amounts constituting ordinary income received by him or her.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations and applicable state and local tax
laws. Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Funds is to obtain the most favorable net results
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through its familiarity
with commissions charged on comparable transactions, as well as by comparing
commissions paid by a Fund to reported commissions paid by others. The Adviser
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.
Each Fund's purchases and sales of portfolio securities are generally
placed by the Adviser with the issuer or a primary market maker for these
securities on a net basis, without any brokerage commission being paid by a
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities but only if a
Fund would obtain the most favorable net results, including such fee, on a
particular transaction. Purchases of underwritten issues may be made which will
involve an underwriting fee paid to the underwriter. To date, no brokerage
commissions have been paid.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply research, market and statistical information to
the Funds. The term "research, market and statistical information" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities; and the availability of securities or
purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is authorized when placing
portfolio transactions for a Fund to pay a brokerage commission in excess of
that which another broker might have charged for effecting the same transaction
solely on account of the receipt of research, market or statistical information.
The Adviser will not place orders with brokers or dealers on the basis that a
broker or dealer has or has not sold shares of a Fund. In effecting transactions
in over-the-counter securities, orders will be placed with the principal
market-makers for the security being traded unless, after exercising care, it
appears that more favorable results are available elsewhere.
In selecting among firms believed to meet the criteria for handling a
particular transaction the Adviser may give consideration to those firms that
have sold or are selling shares of a Fund managed by the Adviser.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which in turn places
orders on behalf of the Fund with issuers, underwriters or other brokers and
dealers. The Distributor receives no commissions, fees or other remuneration
from the Funds for this service.
<PAGE>
Although certain research, market and statistical information from brokers
and dealers can be useful to the Funds and to the Adviser, it is the opinion of
the Adviser that such information will only supplement the Adviser's own
research effort, since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Funds and not all such
information is used by the Adviser in connection with the Funds. Conversely,
such information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Funds.
The Trustees of each Fund review from time to time whether the recapture
for the benefit of a Fund of some portion of the brokerage commissions or
similar fees paid by a Fund on portfolio transactions is legally permissible and
advisable.
Portfolio Turnover
The portfolio turnover rate of SMTTFF (defined by the SEC as the ratio of
the lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities whose remaining maturities at
the time of acquisition were one year or less) for the years ended December 31,
1996 and 1997 were 14.1% and ____%, respectively. The portfolio turnover rates
of SLTTFF for the fiscal years ended October 31, 1996 and 1997 were 37.7% and
____%, respectively. The portfolio turnover rates of SMMB for the years ended
December 31, 1996 and 1997 were 12.2% and ____%, respectively. The portfolio
turnover rates of SHYTFF for the years ended December 31, 1996 and 1997 were
21.9% and ____%, respectively.
<PAGE>
NET ASSET VALUE
Scudder Tax Free Money Fund
The net asset value per share of STFMF is determined by Scudder Fund
Accounting Corporation, twice daily as of twelve o'clock noon and the close of
regular trading on the Exchange on each day when the Exchange is open for
trading. The Exchange normally is closed on the following national holidays: New
Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value
per share is determined by dividing the total assets of the Fund, less all of
its liabilities, by the total number of shares of the Fund outstanding. The
valuation of STFMF's portfolio securities is based upon their amortized cost
which does not take into account unrealized securities gains or losses. This
method involves initially valuing an instrument at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price STFMF
would receive if it sold the instrument. During periods of declining interest
rates, the quoted yield on shares of STFMF may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by STFMF resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Fund would be able to obtain a somewhat higher yield if he purchased shares
of the Fund on that day, than would result from investment in a fund utilizing
solely market values, and existing investors in the Fund would receive less
investment income. The converse would apply in a period of rising interest
rates. Other securities and assets for which market quotations are not readily
available are valued in good faith at fair value using methods determined by the
Trustees and applied on a consistent basis. For example, securities with
remaining maturities of more than 60 days for which market quotations are not
readily available are valued on the basis of market quotations for securities of
comparable maturity, quality and type. The Trustees review the valuation of
STFMF's securities through receipt of regular reports from the Adviser at each
regular Trustees' meeting. Determinations of net asset value made other than as
of the close of the Exchange may employ adjustments for changes in interest
rates and other market factors.
Scudder Limited Term Tax Free Fund, Scudder Medium Term Tax Free Fund,
Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund
The net asset value of shares of SLTTFF, SMTTFF, SMMB and SHYTFF are
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading (the "Value Time"). The Exchange is scheduled to be
closed on 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. Net asset value per share is determined by dividing
the value of the total assets of a Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price. Lacking any sales, the security is valued
at the calculated mean between the most recent bid quotation and the most recent
asked quotation (the "Calculated Mean"). If there are no bid and asked
quotations, the security is valued at the most recent bid quotation. An unlisted
equity security which is traded on The Nasdaq Stock Market ("Nasdaq") is valued
at the most recent sale price. If there are no such sales, the security is
valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the Nasdaq system, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less shall be valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
<PAGE>
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of the funds' other
portfolio holdings is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial highlights of each Fund included in the Funds' prospectuses
and the financial statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance upon the accompanying report of Coopers & Lybrand L.L.P., One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and, given
upon their authority as experts in accounting and auditing. Coopers & Lybrand
L.L.P. is responsible for performing annual (semiannual) audits of the financial
statements and financial highlights of each Fund in accordance with Generally
Accepted Auditing Standards, and the preparation of federal tax returns.
Shareholder Indemnification
STFMF, STFT and SMT are organizations of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declarations of Trust of each Trust
contain an express disclaimer of shareholder liability in connection with the
Funds' property or the acts, obligations or affairs of the Funds. The
Declarations of Trust also provide for indemnification out of the Funds'
property of any shareholder held personally liable for the claims and
liabilities to which a shareholder may become subject by reason 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 a
Fund itself would be unable to meet its obligations.
<PAGE>
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds 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.
Together with securities rated A and Baa, they comprise investment grade
securities. Moody's states that Aa bonds are rated lower than the best bonds
because margins of protection or other elements make long-term risks appear
somewhat larger than for Aaa municipal bonds. Municipal bonds which are rated A
by Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A rated municipal bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Securities rated Baa are considered medium grade, with factors giving security
to principal and interest adequate at present but may be unreliable over any
period of time. Such bonds have speculative elements as well as investment grade
characteristics. Securities rated Ba or below by Moody's are considered below
investment grade. Moody's judges municipal bonds rated Ba to have speculative
elements, with very moderate protection of interest and principal payments and
thereby not well safeguarded under any future conditions. Municipal bonds rated
B by Moody's generally lack characteristics of desirable investments. Long-term
assurance of the contract terms of B-rated municipal bonds, such as interest and
principal payments, may be small. Securities rated Ba or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High grade), A (Good grade), BBB (Investment grade), BB (Below investment
grade) and B. Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions. Bonds rated BBB have an adequate capacity to pay interest
and to repay principal. Adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds of this category than for bonds of higher rated categories.
Securities rated BB or below by S&P are considered below investment grade. Debt
rated BB by S&P faces major ongoing uncertainties or exposure to adverse
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Municipal bonds rated B have a greater vulnerability to
default but currently have the capacity to meet interest payments and principal
repayments. Securities rated BB or below are commonly referred to as "junk"
bonds and as such they carry a high margin of risk.
S&P's top ratings for municipal notes are SP1 and SP2. The designation SP1
indicates a very strong capacity to pay principal and interest. A "+" is added
for those issues determined to possess overwhelming safety characteristics. An
SP2 designation indicates a satisfactory capacity to pay principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A, BBB,
BB and B. Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F1+. Bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings. Securities
rated BB or below by Fitch are considered below investment grade. Fitch
considers bonds rated BB to be speculative because the issuer's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, although financial alternatives can be identified to assist the issuer
in meeting its obligations. While bonds rated B are currently meeting debt
service requirements, they are considered highly speculative in light of the
issuer's limited margin of safety. Securities rated BB or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
<PAGE>
Commercial Paper Ratings
Commercial paper rated A1 or better by S&P has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F1 is the highest rating assigned by Fitch. Among the factors
considered by Fitch in assigning this rating are: (1) the issuer's liquidity;
(2) its standing in the industry; (3) the size of its debt; (4) its ability to
service its debt; (5) its profitability; (6) its return on equity; (7) its
alternative sources of financing; and (8) its ability to access the capital
markets. Analysis of the relative strength or weakness of these factors and
others determines whether an issuer's commercial paper is rated F-1.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
Recently comparatively short-term obligations have been introduced in the
municipal market. S&P, Moody's and Fitch rate such obligations. While the
factors considered in municipal credit evaluations differ somewhat from those
relevant to corporate credits, the rating designations and definitions used with
respect to such obligations by S&P and Moody's are the same, respectively, as
those used in their corporate commercial paper ratings.
<PAGE>
Glossary
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity date)
and to pay a stated rate of interest until maturity. Interest is generally
paid semiannually in amounts equal to one half the annual interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate securities,
obligations issued at a discount and other types of securities which
evidence a debt.
3. Discount and Premium
(a) Market Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market
discount (premium) is the difference between market price and face
value.
(b) Original Issue Discount
An original issue discount is the discount from face value at which
the bond is first offered to the public.
4. Face Value
The value of a bond that appears on the face of the bond, unless the value
is otherwise specified by the issuing company. Face value is ordinarily
the amount the issuing company promises to pay at maturity. Face value is
not an indication of market value.
5. Liquidation
The process of converting securities or other property into cash.
6. Maturity
The date on which the principal amount of a debt obligation comes due by
the terms of the instrument.
7. Municipal Security
Securities issued by or on behalf of states, territories and possessions
of the United States, their political subdivisions, agencies and
instrumentalities and the District of Columbia and other issuers, the
interest from which is, at the time of issuance in the opinion of bond
counsel for the issuers, exempt from federal income tax, except for the
applicability of the alternative minimum tax.
8. Net Asset Value Per Share
The value of each share of each Fund for purposes of sales and
redemptions.
9. Net Investment Income
The net investment income of a Fund is comprised of its interest income,
including accretion of original issue discounts, less amortization of
premiums and expenses paid or accrued computed under Generally Accepted
Accounting Principles (GAAP).
10. Par Value
Par value of a bond is a dollar amount representing the denomination and
assigned value of the bond. It signifies the dollar value on which
interest on the bonds is computed and is usually the same as face value
and maturity value for an individual bond. For example, most bonds are
issued in $1,000 denominations and they have a face value, maturity value
and par value of $1,000. Their market price can of course vary
significantly from $1,000 during their life between issuance and maturity.
11. Series
SMT is composed of two series: SMMB and SHYTFF. Each Series is distinct
from the other, although both SMMB and SHYTFF are combined in one
investment company--SMT.
STFT is composed of two series: SMTTFF and SLTTFF. Each series is
distinct from the other, although both SMTTFF and SLTTFF are combined in
one investment company--STFT.
<PAGE>
Other Information
The CUSIP number for STFMF is 811235-10-0.
The CUSIP number for SLTTFF is 81123Q104.
The CUSIP number for SMTTFF is 811236-20-7.
The CUSIP number for SMMB is 811170-10-9.
The CUSIP number for SHYTFF is 811170-20-8.
STFMF, SMTTFF, SMMB and SHYTFF have a taxable year ending on December 31,
SLTTFF has a taxable year ending October 31.
Portfolio securities of each Fund and each series of SMT are held
separately, pursuant to a custodian agreement, by the Funds' custodian, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02101.
Costs of $41,953 incurred by SLTTFF in conjunction with its organization
had been deferred and are being amortized over five years beginning February 15,
1994.
The firm of Willkie Farr & Gallagher is legal counsel for each Fund.
The name "Scudder Tax Free Money Fund" is the designation of the Trustees
for the time being under an Amended and Restated Declaration of Trust dated
December 9, 1987, the name "Scudder Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987 and the name "Scudder Municipal Trust" is the designation
of the Trustees for the time being under an Amended and Restated Declaration of
Trust dated December 11, 1987, each as amended from time to time, and all
persons dealing with a Fund must look solely to the property of that Fund for
the enforcement of any claims against that Fund as neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of a Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by a Fund's Declaration of Trust, as amended from
time to time. The Declaration of Trust of each Fund is on file at the
Massachusetts Secretary of State's Office in Boston, Massachusetts. All persons
dealing with a Fund must look only to the assets of that Fund for the
enforcement of any claims against such Fund as no other series of a Trust
assumes any liabilities for obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes each
Fund's net asset value. STFMF pays SFAC an annual fee equal to 0.020% of the
first $150 million of average daily net assets, 0.0060% of such assets in excess
of $150 million, 0.0035% of such assets in excess of $1 billion, plus holding
and transaction charges for this service. For the year ended December 31, 1997,
the amount charged to STFMF by SFAC aggregated $______, of which $______ was
unpaid on December 31, 1997. SLTTFF, SMTTFF, SMMB and SHYTFF pay SFAC an annual
fee equal to 0.024% of the first $150 million of average daily net assets,
0.0070% of such assets in excess of $150 million, 0.0040% of such assets in
excess of $1 billion, plus holding and transaction charges for this service. The
fee incurred by SLTTFF to SFAC for the fiscal year ended October 31, 1997
amounted to $_______. For the year ended December 31, 1997, the amounts charged
to SMTTFF, SMMB and SHYTFF by SFAC aggregated $_________, $________ and
$__________, respectively. For the year ended December 31, 1997, the amounts
unpaid by SMTTFF, SMMB, and SHYTFF aggregated were $________, $_________ and
$________, respectively.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend-paying agent for the Funds. Service Corporation also serves as
shareholder service agent for the Funds. SMTTFF, SLTTFF, SMMB and SHYTFF each
pay Service Corporation an annual fee of $25.00 for each account maintained for
a shareholder. STFMF pays Service Corporation an annual fee of $28.90 for each
account maintained for a shareholder. $________ was charged to STFMF for the
year ended December 31, 1997 of which $_______ was unpaid at December 31, 1997.
A total of $________ was charged by Service Corporation to SMMB for the calendar
year ended December 31, 1997, $________ of which was unpaid at December 31,
1997. A total of $____________ was charged to SHYTFF for the year ended December
31, 1997, $________ of which was unpaid at December 31, 1997. $________ was
charged to SMTTFF for the year ended December 31, 1997, of which $________ was
unpaid at December 31, 1997. For SLTTFF for the year ended October 31, 1997,
Service Corporation imposed an aggregated fee of $________.
<PAGE>
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
Scudder Trust Company, an affiliate of the Adviser, provides subaccounting
and recordkeeping services for shareholder accounts in certain retirement and
employee benefit plans. Annual service fees are paid by the Fund to Scudder
Trust Company, Two International Place, Boston, Massachusetts 02110-4103 for
such accounts. Each Fund pays Scudder Trust Company an annual fee of $17.55 per
shareholder account.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which each Trust has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statements and their amendments for
further information with respect to the Funds and the securities offered hereby.
The Registration Statements and their amendments are available for inspection by
the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder Tax Free Money Fund
The financial statements, including the investment portfolio, of Scudder
Tax Free Money Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1997 and are hereby deemed to be part of this Statement
of Additional Information.
Scudder Limited Term Tax Free Fund
The financial statements, including the investment portfolio of Scudder
Limited Term Tax Free Fund together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated October 31, 1997, and are hereby deemed to be part of this Statement
of Additional Information.
Scudder Medium Term Tax Free Fund
The financial statements, including the investment portfolio, of Scudder
Medium Term Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1997, and are hereby deemed to be part of this Statement
of Additional Information.
Scudder Managed Municipal Bonds
The financial statements, including the investment portfolio, of Scudder
Managed Municipal Bonds, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1997 and are hereby deemed to be part of this Statement
of Additional Information.
Scudder High Yield Tax Free Fund
The financial statements, including the investment portfolio, of Scudder
High Yield Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1997 and are hereby deemed to be part of this Statement
of Additional Information.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
<PAGE>
Scudder
High Yield
Tax Free Fund
Annual Report
December 31, 1997
Pure No-Load(TM) Funds
A fund that seeks to provide a high level of income, exempt from regular federal
income tax, from an actively managed portfolio consisting primarily of
investment-grade municipal securities.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder High Yield Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 1/22/87 Total Net Assets as of Ticker Symbol: SHYTX
12/31/97: $337 million
- --------------------------------------------------------------------------------
o Scudder High Yield Tax Free Fund's 30-day net annualized SEC yield was 4.57%
as of December 31, 1997. For investors in the two highest federal tax brackets
of 36% and 39.6%, the Fund's yield was equivalent to a fully taxable 7.14% and
7.57%, respectively.
o The Fund received five stars from Morningstar, reflecting the highest possible
rating for risk-adjusted performance through December 31, 1997.*
o For one-, three-, and ten-year periods, the Fund's total returns placed it in
the top 15% of performance among similar municipal bond funds as tracked by
Lipper Analytical Services. Please see page 6 for additional Lipper performance
information.
Table of Contents
3 Letter from the Fund's President 21 Notes to Financial Statements
4 Performance Update 24 Report of Independent Accountants
5 Portfolio Summary 25 Tax Information
6 Portfolio Management Discussion 25 Officers and Trustees
9 Glossary of Investment Terms 26 Shareholder Meeting Results
10 Investment Portfolio 29 Investment Products and Services
17 Financial Statements 30 Scudder Solutions
20 Financial Highlights
* For your information, these ratings are subject to change every month and are
calculated from the Fund's five-year average annual return in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor that
reflects fund performance below T-bill returns. The Fund received five stars
for three-, five-, and ten-year performance, and was rated among 1494, 720,
and 337 municipal funds for the respective periods. Of the funds rated, 10%
received five stars, and 22.5% received four stars. Past performance is no
guarantee of future returns.
2 - Scudder High Yield Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you on Scudder High Yield Tax Free Fund's
performance over its most recent 12-month reporting period ended December 31,
1997. In addition to the Fund's five-star Morningstar rating as of December 31
(see page 2), the Fund placed in the top 15% of similar tax-free funds tracked
by Lipper for total return performance over one-, three-, and ten-year periods.
The Fund also posted a 4.57% 30-day net annualized SEC yield as of December 31,
which is equivalent to a taxable yield of 7.57% for investors in the top federal
tax bracket. Though municipal bond yields are currently lower than they have
been in recent years, the difference or "spread" between bond yields and
inflation during the Fund's most recent fiscal year was larger than it has been
since December 1994. Regardless of the overall level of interest rates, this
spread represents what bond investors really earn. Please see the discussion
beginning on page 6 for more information.
For those of you who are interested in new Scudder products, we recently
introduced a new industry sector fund, Scudder Financial Services Fund. One of
Scudder's Choice Series sector funds, the Fund seeks long-term growth by
investing in financial services companies in the U.S. and abroad. In addition,
two other Choice Series funds will be launched on March 2: Scudder Health Care
Fund, seeking long-term growth from health care companies located around the
world, and Scudder Technology Fund, pursuing long-term growth by investing in
companies that develop, produce, or distribute technology.
Finally, as you may know, the Fund's investment adviser has changed its
name to Scudder Kemper Investments, Inc. from Scudder, Stevens & Clark, Inc.,
pursuant to the acquisition of a majority interest in Scudder, Stevens & Clark
by Zurich Insurance Company, and the combining of Scudder's business with that
of Zurich Kemper Investments, Inc.
If you have any questions regarding Scudder High Yield Tax Free Fund or any
other Scudder fund, please call Investor Relations at 1-800-225-2470. Or visit
Scudder's Web site at http://funds.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder High Yield Tax Free Fund
3 - Scudder High Yield Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of December 31, 1997
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/97 $10,000 Cumulative Annual
- --------------------------------------------
SCUDDER HIGH YIELD TAX FREE FUND
- --------------------------------------------
1 Year $ 11,204 12.04% 12.04%
5 Year $ 14,558 45.58% 7.80%
10 Year* $ 24,310 143.10% 9.29%
- --------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------------
1 Year $ 10,921 9.21% 9.21%
5 Year $ 14,263 42.63% 7.36%
10 Year* $ 22,791 127.91% 8.58%
- --------------------------------------------
*The Fund commenced operations on January 22, 1987.
Index comparisons begin January 31, 1987.
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended December 31
SCUDDER HIGH YIELD TAX FREE FUND
Year Amount
- ----------------------
'87 $10,000
'88 $11,227
'89 $12,483
'90 $13,329
'91 $14,958
'92 $16,302
'93 $18,473
'94 $17,357
'95 $20,328
'96 $21,171
'97 $23,137
LEHMAN BROTHERS MUNICIPAL
BOND INDEX
Year Amount
- ----------------------
'87 $10,000
'88 $11,014
'89 $12,203
'90 $13,093
'91 $14,683
'92 $15,979
'93 $17,941
'94 $17,013
'95 $19,984
'96 $20,869
'97 $22,791
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have a
credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods Ended December 31
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 11.06 $ 11.35 $ 11.19 $ 11.67 $ 11.90 $ 12.55 $ 10.86 $ 12.19 $ 12.04 $ 12.78
INCOME DIVIDENDS.. $ .83 $ .76 $ .77 $ .76 $ .72 $ .67 $ .66 $ .72 $ .66 $ .67
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ .06 $ .05 $ .21 $ .27 $ .28 $ -- $ -- $ -- $ --
FUND TOTAL
RETURN (%)........ 13.48 10.32 6.02 13.46 10.88 13.85 -8.38 19.28 4.43 12.04
INDEX TOTAL
RETURN (%)........ 10.16 10.79 7.29 12.14 8.82 12.28 -5.17 17.46 4.43 9.21
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may be
worth more or less than when purchased. If the Adviser had not temporarily
capped expenses, the average annual total return for the Fund for the one and
five year periods and life of Fund would have been lower.
4 - Scudder High Yield Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 23%
Toll Revenue/Transportation 13%
Electric Utility Revenue 11%
Port/Airport & Revenue 10%
Pollution Control/
Industrial Development 8%
Core Cities/Lease 7%
Project Revenue/Special Assessment 6%
State General Obligation 6%
Housing Finance Authority 5%
Miscellaneous Municipal 11%
- --------------------------------------------
100%
- --------------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
As of December 31, the Fund held
securities issued in 29 states
plus the District of Columbia
and the Virgin Islands
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 16%
AA 8%
A 12%
BBB 36%
Not Rated of Below BBB 28%
- --------------------------------------------
100%
- --------------------------------------------
Weighted average quality: A
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
During the period, we
emphasized bonds rated
BBB or below and selectively
sold certain investment grade
bonds based on their credit
outlook or call structure
concerns.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
1 - 5 21%
5 - 10 30%
10 - 20 45%
- - 20 4%
- --------------------------------------------
100%
- --------------------------------------------
Weighted average effective maturity: 9.5 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund continued to maintain a
cautious stance on the market, with
a neutral average duration close to
that of the Lehman Brothers Municipal
Bond Index.
For more complete details about the Fund's investment portfolio, see page 10. A
monthly Investment Portfolio Summary and quarterly Portfolio Holdings are
available upon request.
5 - Scudder High Yield Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
Reflecting investors' confidence in the bond market and the U.S. economy,
lower-rated municipal bonds outperformed other sectors of the tax-free market
during 1997 and helped Scudder High Yield Tax Free Fund post a 12.04% total
return for its most recent fiscal year ended December 31. In addition, the Fund
provided a 30-day net annualized SEC yield of 4.57% as of December 31,
equivalent to fully taxable yields of 7.14% and 7.57%, respectively, for
investors in the 36% and 39.6% tax brackets.
The Fund's 12.04% total return was based on a $0.74 increase in net asset value
to $12.78, plus income distributions of $0.67. The Fund's return outpaced the
10.11% average of 43 similar funds as tracked by Lipper Analytical Services,
Inc. As shown in the accompanying chart, the Fund's average annual total returns
place it in the top 15% of its peer group for the 12-month period, as well as
for three- and ten-year periods. Please turn to the Performance Update on page
for more information on the Fund's long-term progress, including comparisons
with the unmanaged Lehman Brothers Municipal Bond Index.
Bonds Benefit as Inflation Fades
The year 1997 was rewarding for most bond investors as the market's focus
gradually shifted from the possibility of an overheating U.S. economy and
increases in inflation to the Asian currency crisis and speculation about
deflation. As Asian currencies such as the Korean won and the Thai baht
surrendered approximately half of their value versus the U.S. dollar from July
to December, expectations grew that lower-cost Asian imports and reduced profit
expectations for global U.S.-based companies would keep the domestic economy and
inflation under control for some time to come, despite nearly full employment.
Competitive Total Return
(Average annual returns for periods ended
December 31, 1997)
--------------------------------------------------------
Scudder
High Number
Yield Tax of
Free Fund Lipper Funds Percentile
Period return return Rank tracked Ranking
---------------------------------------------------------
1 year 12.04% 10.11% 5 of 43 Top 12%
3 years 11.76% 9.91% 3 of 33 Top 9%
5 years 7.80% 7.22% 6 of 21 Top 29%
10 years 9.29% 8.16% 2 of 16 Top 13%
Past performance does not guarantee future results.
Yield declines and price gains in the municipal bond market reflected this
favorable environment. Despite an increase in new issue volume compared with
1996, municipal bonds posted price gains across the maturity spectrum. For
example, yields of 10-year municipal bonds declined approximately one half of a
percentage point, and their prices rose 4% during the period.
It is important to note that in the current environment of lower municipal
yields and much lower inflation, "real" interest rates -- interest rates minus
increases in the CPI, a recognized barometer of inflation -- have rarely been
6 - Scudder High Yield Tax Free Fund
<PAGE>
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Municipal Yields Compared with Inflation
December 31, 1994 - December 31, 1997
-------------------------------------------------------------
CPI 10-year municipal bonds
-------------------------------------------------------------
1/95 2.80% 5.80%
3.05 5.30
2.76 5.05
2.81 4.90
1/96 2.73 4.65
2.90 5.00
2.95 5.15
2.99 5.00
1/97 3.04 4.85
2.50 5.10
2.23 4.75
2.08 4.50
12/97 1.84 4.60
(chart indicates a 2.76% spread between the 10-year municipal bonds at 4.60%
(12/97) and the CPI at 1.84% (12/97)
Municipal yields represented by 10-year, AAA-rated municipal bonds.
Inflation represented by CPI (Consumer Price Index).
Sources: Salomon Brothers; Datastream
higher. Real interest rates depict the level of income bondholders actually
earn, taking into account the erosion in value of their principal from
inflation. The above chart illustrates the gap between municipal bond yield
levels and inflation since December 1994.
High Yield and Call Protection
In conjunction with the Fund's primary goals of generating high tax-free income
while posting competitive total returns, we emphasized bonds rated BBB and below
(ratings under BBB are considered below investment grade) during the most recent
fiscal year. At the close of the year, 64% of the Fund's portfolio was rated BBB
or below. At the same time, we selectively sold certain investment grade bonds
based on their credit outlook or call structure concerns. The Fund also
continued to emphasize call protection. (Generally a bond is called in by its
issuer so that it can be refinanced at a lower prevailing rate.) Our
call-protection strategy continues to provide a more reliable income stream than
would exist if the portfolio held a significant proportion of bonds that could
be called in before their stated maturities.
Overall, we continued to maintain a cautious stance on the market, with a
neutral average duration close to that of the Lehman Brothers Municipal Bond
Index. As of December 31, 1997, the Fund's average duration was 7.1 years.
(Duration gives relative weight to both interest and principal payments and has
replaced average maturity as the standard measure of interest rate sensitivity
among professional investors. Generally the shorter the duration, the less
sensitive a portfolio will be to changes in interest rates.)
Diversification remains an important strategy for the Fund, allowing the spread
of risk over a large number of sectors, maturities, and geographic areas. During
the fiscal year, the Fund's holdings in San Joaquin Hills California Toll
Revenue bonds significantly boosted performance. Foothills Transportation
Corridor bonds, a "sister" project to San Joaquin Hills, also benefited the
Fund. As of December 31, 1997, the Fund held securities issued in 29 states plus
the District of Columbia and the Virgin Islands.
Inflation Expectation is Low
Amid the gloom (and economic pain for the people of Asia) of the Asian currency
crisis is a ray of sunshine -- the relaxing of inflation worries in the U.S.
bond market. Though no one can predict exactly how long it will last, we expect
7 - Scudder High Yield Tax Free Fund
<PAGE>
this slow-growth, low-inflation environment to continue and to benefit municipal
bonds over the coming months. With this in mind, we will continue to purchase
selected lower-rated municipal bonds with attractive maturity structure and,
where possible, call protection. We will also attempt to limit the amount of
taxable capital gains generated through turnover in the Fund's portfolio,
carefully weighing each trade. As always, rather than attempting to predict
short-term market movements, we will look for value as we seek high tax-free
income and attractive total returns for our investors.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Donald C. Carleton
Philip G. Condon Donald C. Carleton
Scudder High Yield
Tax Free Fund:
A Team Approach to Investing
Scudder High Yield Tax Free Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management
process. Team members work together to develop investment strategies and
select securities for the Fund's portfolio. They are supported by Scudder's
large staff of economists, research analysts, traders, and other investment
specialists who work in our offices across the United States and abroad. We
believe our team approach benefits Fund investors by bringing together many
disciplines and leveraging Scudder's extensive resources.
Lead Portfolio Manager Philip G. Condon has had responsibility for Scudder
High Yield Tax Free Fund's day-to-day operations since its inception in 1987,
having joined Scudder in 1983. Phil, who has worked in the investment industry
since 1977, also serves as Lead Portfolio Manager for Scudder Massachusetts
Tax Free Fund and is a Portfolio Manager of other tax free funds. Donald C.
Carleton, Portfolio Manager, became a member of the team in 1995 and has been
a portfolio manager at Scudder since he joined the firm in 1983. Don, who
assists in implementing investment strategy, also serves as Portfolio Manager
for Scudder Tax Free Money Fund and other Scudder funds.
8 - Scudder High Yield Tax Free Fund
<PAGE>
Glossary of Investment Terms
BOND An interest-bearing security issued by the
federal, state, or local government or a
corporation that obligates the issuer to pay
the bondholder a specified amount of interest
for a stated period -- usually a number of
years -- and to repay the face amount of the
bond at its maturity date.
GENERAL OBLIGATION BOND A municipal bond backed by the "full faith
and credit" (including the taxing and further
borrowing power) of the city, state, or
agency that issues the bond. A general
obligation bond is repaid with the issuer's
general revenue and borrowings.
INFLATION An overall increase in the prices of goods
and services, as happens when business and
consumer spending increases relative to the
supply of goods available in the marketplace
-- in other words, when too much money is
chasing too few goods. High inflation has a
negative impact on the prices of fixed-income
securities.
MUNICIPAL BOND An interest-bearing debt security issued by a
state or local government entity.
NET ASSET VALUE (NAV) The price per share of a mutual fund based on
the sum of the market value of all the
securities owned by the fund divided by the
number of outstanding shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument
would have to provide to equal that of a
tax-free municipal bond on an after-tax
basis.
30-DAY SEC YIELD The standard yield reference for bond funds,
based on a formula prescribed by the SEC.
This annualized yield calculation reflects
the 30-day average of the income earnings of
every holding in a given fund's portfolio,
net of expenses, assuming each is held to
maturity.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return --
annualized or compound -- is based on a
combination of share price changes plus
income and capital gain distributions, if
any, expressed as a percentage gain or loss
in value.
(Sources: SKI; Barron's Dictionary of Finance and Investment Terms)
9 - Scudder High Yield Tax Free Fund
<PAGE>
Investment Portfolio as of December 31, 1997
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Investments 2.0%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Florida
Halifax Hospital Medical Center, FL, Hospital Revenue, Auction Reset
Security, Series A, 3.84%, 10/1/19 (b) ....................................... 500,000 AAA 500,000
Kansas
Burlington, KS, Environmental Improvement Revenue, Kansas City Power &
Light, Periodic Auction Reset, 4.15%, 12/1/23 ................................ 800,000 A 800,000
Massachusetts
Massachusetts Health & Educational Facilities Authority:
Capital Assets Program, Series 1989 G-1, Weekly Demand Note, 3.7%,
1/1/19 (b) ................................................................... 1,000,000 AAA 1,000,000
Series D, Weekly Demand Note, 3.55%, 1/1/35 (b)** ............................ 3,000,000 SP1 3,000,000
Massachusetts Industrial Finance Agency, Merritt Care, Daily Demand Note,
3.6%, 4/1/09** ............................................................... 200,000 MIG1 200,000
Ohio
Cuyahoga County, OH, Health & Education, University Hospital of Cleveland,
Daily Demand Note, 5.2%, 1/1/16** ............................................ 1,200,000 MIG1 1,200,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $6,700,000) 6,700,000
- -----------------------------------------------------------------------------------------------------------------------------
Long-term Municipal Investments 98.0%
- -----------------------------------------------------------------------------------------------------------------------------
Alaska
North Slope Borough, AK, General Obligation, Capital Appreciation, Series B,
Zero Coupon, 6/30/05 (b) ..................................................... 7,600,000 AAA 5,379,812
Arizona
Arizona Educational Loan Marketing Corporation, Educational Loan Revenue
35 Day Auction, Series 1997A, 4.15%, 12/1/02 ................................. 3,000,000 AA 3,000,000
Maricopa County, AZ, Industrial Development Revenue, Resource Recovery,
Private Placement, 9.25%, 5/1/15 ............................................. 3,915,000 NR 3,930,386
McDowell Mountain Ranch, AZ, Communities Facilities District,
8.25%, 7/15/19 ............................................................... 3,000,000 NR 3,256,410
California
California Community Development Authority, Certificates of Participation,
St. Joseph's Health System Series 1994, 4.8%, 7/1/24 ......................... 500,000 MIG1 500,000
California Pollution Control Financing Authority, Solid Waste Disposal Revenue,
Canadian Fibre of Riverside PJ, Series 1997A, 9%, 7/1/19 ..................... 6,000,000 NR 6,334,740
Foothill Eastern Transportation Corridor Agency, CA, Toll Road Revenue,
Senior Lien:
Series A, Zero Coupon, 1/1/10 ................................................ 7,000,000 BBB 5,225,570
Series A, Zero Coupon, 1/1/11 ................................................ 4,415,000 BBB 3,323,789
Series A, Zero Coupon, 1/1/12 ................................................ 6,000,000 BBB 4,527,180
Series A, Step-up Coupon 0% to 1/1/05, 7.10% to 1/1/13, 1/1/14 ............... 2,875,000 BBB 2,173,558
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder High Yield Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long Beach California Harbor Revenue, AMT, Series 1998 A, 6%, 5/15/09 (e) ..... 2,770,000 AAA 3,064,229
Long Beach, CA, Aquarium of the Pacific Project, 6.1%, 7/1/10 ................. 4,500,000 BBB 4,752,270
Los Angeles County, CA, Certificate of Participation, Marina Del Ray, Series A,
6.25%, 7/1/03 ................................................................ 5,500,000 NR 5,944,895
Millbrae California Residential Facilities, Revenue Magnolia of Millbrae
Project, Series 1997A, 7.375%, 9/1/27 ........................................ 1,000,000 NR 1,013,910
Sacramento, CA, Cogeneration Project Revenue, Proctor & Gamble Project,
6.5%, 7/1/14 ................................................................. 2,500,000 BBB 2,732,125
San Francisco, CA, City and County Redevelopment Agency Residential Facility,
Coventry Park Project, Series 1996A, 8.5%, 12/1/26 ........................... 2,000,000 NR 2,216,500
San Joaquin Hills, CA, Transportation Corridor Agency, Orange County, Senior
Lien Toll Road Revenue:
Zero Coupon, 1/1/11 ......................................................... 5,000,000 BBB 4,881,650
Zero Coupon, 1/1/12 ......................................................... 15,000,000 BBB 14,677,350
Zero Coupon, 1/1/13 ......................................................... 4,000,000 BBB 3,913,960
Colorado
Denver, CO, Airport System Revenue:
Series A, Zero Coupon, 11/15/01 .............................................. 5,120,000 BBB 4,268,954
Series A, Zero Coupon, 11/15/03 .............................................. 3,050,000 BBB 2,288,751
Series A, Zero Coupon, 11/15/04 .............................................. 3,130,000 BBB 2,221,737
Series A, Zero Coupon, 11/15/05 .............................................. 1,855,000 BBB 1,243,091
Series 1991 D, 7.75%, 11/15/13 (f) ........................................... 9,775,000 BBB 12,383,948
Denver, CO, Urban Renewal Authority, Tax Increment Revenue, 7.75%, 9/1/16 ..... 2,500,000 SS&C 2,771,100
Connecticut
Connecticut Development Authority, Mystic Marinelife Aquarium Project
Revenue, 6.875%, 12/1/17 ..................................................... 1,000,000 SS&C 1,064,190
Connecticut State Health Finance Authority Edgehill 1997 A, 6.875%, 7/1/17 .... 3,000,000 NR 3,204,240
Mashantucket Western Pequot Tribe, CT:
Special Revenue, 6.4%, 9/1/11 ................................................ 1,490,000 BBB 1,714,826
Special Revenue, 6.4%, 9/1/11 ................................................ 1,510,000 BBB 1,683,559
Special Revenue Subordinate 144A, Series 1997 B, 5.7%, 9/1/12 ................ 1,000,000 BBB 1,035,270
District Of Columbia
District of Columbia, Certificate of Participation, 7.3%, 1/1/13 .............. 4,650,000 BB 5,099,609
District of Columbia, General Obligation, Series A, 5.875%, 6/1/05 (b)(f) ..... 4,300,000 AAA 4,678,185
District of Columbia, Hospital Refunding Revenue, Metlantic Washington
Hospital Center, 1992 Series A, 7.125%, 8/15/19 .............................. 3,000,000 AAA 3,392,550
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder High Yield Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Florida
Broward County, FL, Housing Finance Authority, Single Family Mortgage
Revenue, Zero Coupon, 4/1/14 ................................................. 3,270,000 A 651,319
Indian Trace, FL, Community Development Authority, Special Assessment
District Bonds, 6.875%, 4/1/10 ............................................... 2,340,000 NR 2,439,754
Indian Trace, FL, Special Tax Revenue, Water Management, 8.25%, 5/1/05 ........ 2,220,000 NR 2,447,284
Georgia
Athens-Clarke County, GA, First Lien, Wesley Woods, Series 1997, 6.35%,
10/1/17 ...................................................................... 1,575,000 NR 1,604,846
Coweta County, GA, Residential, Care Facilities for the Elderly 1st Lien,
Wesley Woods, Series 1996A, 8.25%, 10/1/26 ................................... 1,000,000 NR 1,163,590
Municipal Electric Authority of Georgia, Power Revenue, Series Z, 5.5%,
1/1/12 ....................................................................... 1,375,000 A 1,455,011
Rockdale County, GA, Development Authority Solid Waste Disposal Revenue,
Visy Paper Inc. Project, Series 1993, 7.4%, 1/1/16 ........................... 4,815,000 NR 5,223,644
Illinois
Chicago-O'Hare International Airport, IL, Special Facilities Revenue,
American Airlines, Project A, Series 1990, 7.875%, 11/1/25 ................... 1,000,000 BBB 1,101,170
Hoffman Estates, IL, Tax Incremental Revenue, Zero Coupon, 5/15/06 ............ 4,000,000 A 2,697,840
Illinois Health Facilities Authority Revenue Refunding Memorial
Health System Series 1997, 5%, 10/1/08 ....................................... 1,325,000 AAA 1,414,703
Winnebago County, IL, School District #122, 6.45%, 6/1/08 (b) ................. 1,500,000 AAA 1,750,845
Indiana
Fishers, IN, Economic Development Revenue, First Mortgage/United Student
Aid Inc. Project, Series 1989, 8.25%, 9/1/09 ................................. 2,000,000 NR 2,072,760
Indiana Municipal Power Agency, Power Supply System Refunding Revenue,
Series 1983 B, 5.875%, 1/1/09 (b) ............................................ 2,300,000 AAA 2,563,557
Indianapolis, IN, Economic Development, Refunding and Improvement Revenue,
Robin Run Village Project, Series 1992, 7.625%, 10/1/22 ...................... 1,500,000 BBB 1,670,670
Maine
Maine Finance Authority Huntington Common, Series 1997 A, 7.5%, 9/1/27 ........ 1,000,000 NR 1,015,380
Maryland
Prince George's County, MD, Greater Southeast Healthcare, 6.2%, 1/1/08 ........ 1,000,000 BBB 1,043,760
Massachusetts
Boston, MA, Industrial Development Authority, Springhouse Project, 9.25%,
7/1/25 ....................................................................... 1,000,000 NR 1,173,600
Lowell, MA, General Obligation, 8.3%, 2/15/05 ................................. 365,000 BBB 409,453
Massachusetts Health & Educational Facilities Authority, Cooley Dickson
Hospital Inc., 7.125%, 11/15/18 .............................................. 1,850,000 AAA 2,090,926
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder High Yield Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts Industrial Finance Agency:
Solid Waste Disposal, Peabody Monofil Project, 9%, 9/1/05 .................... 2,515,000 NR 2,762,225
Edgewood Retirement Community, Series A, 9%, 11/15/25 ........................ 1,000,000 NR 1,171,360
Michigan
Detroit, MI, Downtown Development Authority, Tax Increment:
Series 1996, Zero Coupon, 7/1/11 ............................................. 3,150,000 A 1,500,408
Series 1996, Zero Coupon, 7/1/12 ............................................. 3,150,000 A 1,410,224
Michigan State Hospital Finance Authority Revenue, Sinai Hospital:
Series 1995, 6.625%, 1/1/16 .................................................. 2,990,000 BBB 3,309,781
Series 1995, 7.5%, 10/1/27 ................................................... 2,000,000 BBB 2,270,320
Mississippi
Mississippi Development Bank Special Obligation, Diamond Lakes Utilities,
Series 1997 A, 6.25%, 12/1/17 ................................................ 2,000,000 SS&C 2,016,580
Nevada
Nevada State Housing Division, Single Family Mortgage Revenue, Series R,
5.95%, 10/1/11 ............................................................... 1,600,000 AA 1,673,536
New Hampshire
New Hampshire Higher Education & Health Facilities Authority:
Monadnok Community Hospital, Series 1990, 9.125%, 10/1/20 .................... 1,415,000 NR 1,619,651
New Hampshire Catholic Charity:
8.4%, 8/1/11 ................................................................ 600,000 BBB 698,502
Series 1997, 5.8%, 8/1/22 ................................................... 2,760,000 BBB 2,811,143
St. Joseph's Hospital:
7.5%, 1/1/07 ................................................................ 1,490,000 A 1,620,897
7.5%, 1/1/16 ................................................................ 2,600,000 A 2,818,556
New Hampshire Higher Educational & Health Facilities Authority Revenue,
Riverwoods at Exeter:
Series A, 6.375%, 3/1/13 .................................................... 725,000 SS&C 759,452
Series A, 6.5%, 3/1/23 ...................................................... 1,000,000 SS&C 1,052,650
New Jersey
New Jersey Economic Development Authority, Methodist Homes, 7.5%, 7/1/25 ...... 1,000,000 NR 1,113,290
New York
Glen Cove HSB AU AMT C06, 8.25%, 10/1/26 ...................................... 1,500,000 NR 1,671,780
Islip New York Community Development Agency, 7.5%, 3/1/26 ..................... 2,500,000 NR 2,768,175
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder High Yield Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Metropolitan Transportation Authority of New York, Transit Facilities Revenue:
7%, 7/1/09 ................................................................... 1,000,000 BBB 1,109,630
Service Contract, Series O, 5.75%, 7/1/13 .................................... 2,750,000 BBB 2,995,520
New York State Dormitory Authority Revenue, 6.5%, 2/15/11 ..................... 1,000,000 A 1,168,300
New York City, NY, General Obligation:
Series 1994 B, 7.3%, 8/15/10 ................................................. 90,000 A 105,884
Series 1996 A, 7%, 8/1/07 .................................................... 5,000,000 A 5,793,050
Series B, 6.1%, 8/15/05 ...................................................... 3,500,000 A 3,808,315
Series B1, Prerefunded 8/15/04 at 101, 7.3%, 8/15/10 (d) ..................... 1,080,000 AAA 1,275,404
New York City, NY, Industrial Development Agency, Visy Paper Inc. Project,
Series 1995, 7.95%, 1/1/28 ................................................... 1,000,000 NR 1,153,050
New York State Dormitory Authority Revenue, 6.5%, 2/15/10 ..................... 1,500,000 A 1,748,775
New York State Dormitory Authority Revenue Bonds, Mental Health Services
Facilities Improvement:
6%, 8/15/12 ................................................................. 2,500,000 A 2,809,650
6%, 8/15/16 ................................................................. 6,000,000 A 6,636,240
Ohio
Franklin County, OH, Health Care Facilities Revenue Refunding, Ohio
Presbyterian Services:
Series 1997, 5.35%, 7/1/09 .................................................. 500,000 NR 502,475
Series 1997, 5.5%, 7/1/11 ................................................... 500,000 NR 502,695
Series 1997, 5.5%, 7/1/17 ................................................... 3,000,000 NR 2,957,670
Hamilton County, OH, Health System Revenue, Franciscan Sisters of the Poor
Health System, Providence Hospital, Series 1992, 6.8%, 7/1/08 ................ 5,485,000 BBB 5,913,982
Pennsylvania
Delaware County, Pennsylvania Authority, Revenue Refunding:
White Horse Village, Series A, 6.7%, 7/1/07 .................................. 1,000,000 NR 1,046,380
White Horse Village Inc., CCRC, Series 1996 A, 7.5%, 7/1/18 .................. 2,000,000 NR 2,150,500
Delaware County, PA, Industrial Development Authority Revenue,
Resource Recovery Facilities Series A, 6%, 1/1/09 ............................ 2,000,000 A 2,162,380
Montgomery County, PA, Redevelopment Authority, Multi-Family Housing
Revenue Refunding, KBF Associates, LP Project, 6.375%, 7/1/12 ................ 5,500,000 BBB 5,727,425
Pennsylvania Higher Education Authority, Medical College of Pennsylvania,
Series B, 7.25%, 3/1/05 ...................................................... 1,000,000 AAA 1,110,070
Philadelphia Pennsylvania Authority for Industrial Development
Revenues, 6.5%, 10/1/27 ...................................................... 1,500,000 NR 1,590,165
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder High Yield Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philadelphia, PA, Hospital and Higher Education Facilities Authority,
Hospital Revenue, Albert Einstein Medical Center, 7.625%, 4/1/11 ............. 2,500,000 A 2,637,825
Pottsville, PA, Hospital Authority, Warne Clinic, 7.25%, 7/1/24 ............... 3,000,000 BBB 3,308,520
South Carolina
Piedmont Municipal Power Agency, South Carolina Electrical Revenue
Refunding, Series 1998A, 5.5%, 1/1/13 (e) .................................... 1,500,000 AAA 1,599,765
South Carolina Jobs-Economic Development Authority, Hospital Facilities
Revenue, South Carolina Baptist Hospital, 5.3%, 8/1/09 (b) ................... 8,000,000 AAA 8,344,480
South Dakota
South Dakota Health & Educational Facilities Authority Revenue, Prairie
Lakes Health Care System:
7.125%, 4/1/10 .............................................................. 1,000,000 BBB 1,101,160
7.25%, 4/1/22 ............................................................... 1,000,000 BBB 1,106,830
South Dakota Housing Development Authority, Home Ownership Mortgage,
Series A, 6.4%, 5/1/12 ....................................................... 3,500,000 AAA 3,696,840
Texas
Bexar County, TX, Housing Finance Corporation, Series A, Subject to AMT,
GNMA Collateralized Mortgage, 8.2%, 4/1/22 ................................... 943,000 AAA 989,792
Dallas-Fort Worth, TX, International Airport:
American Airlines Inc., 7.5%, 11/1/25 ........................................ 1,910,000 BBB 2,084,440
American Airlines, 7.25%, 11/1/30 ............................................ 5,000,000 BBB 5,592,700
Hidalgo County, TX, Health Services, Mission Hosptial, Series 1996, 6.75%,
8/15/16 ...................................................................... 2,500,000 BBB 2,721,375
Midland County, TX, Hospital District, Midland Memorial Hospital,
7.5%, 6/1/16 ................................................................. 1,500,000 BBB 1,705,065
Utah
Salt Lake City, UT, Hospital Revenue, Intermountain Healthcare
Systems, 6.65%, 2/15/12 ...................................................... 2,000,000 AA 2,235,260
Vermont
Vermont Housing Finance Agency, Multi-Family Housing Revenue, Northgate
Housing Project, 8.25%, 6/15/20 .............................................. 1,035,000 NR 1,085,539
Virgin Islands
Virgin Islands Public Finance Authority, General Obligation, Matching Fund
Loan Notes, Series A, 7.25%, 10/1/18 ......................................... 6,500,000 NR 7,293,000
Virginia
Pittsylvania County, VA, Industrial Development Authority, Multitrade of
Pittsylvania County, L.P. Project:
7.45%, 1/1/09 ............................................................... 1,500,000 NR 1,658,295
7.5%, 1/1/14 ................................................................ 3,500,000 NR 3,872,890
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder High Yield Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (c) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia College Building Authority, Educational Facilities Revenue,
Marymount University Project, 7%, 7/1/22 ..................................... 1,200,000 NR 1,306,752
Washington
Washington Public Power Supply System:
Nuclear Project #2:
5.4%, 7/1/12 ................................................................ 3,250,000 AA 3,365,863
Series 1996A, 6%, 7/1/08 (b) ................................................ 3,000,000 AAA 3,344,010
Refunding Revenue:
Nuclear Project #2, Inverse Floater, 6.42%, 7/1/12* ......................... 3,000,000 AA 3,168,750
Nuclear Project #2, Series B, 6.3%, 7/1/12 .................................. 10,000,000 AA 11,389,600
Nuclear Project #3, Series 1993 B, 5.65%, 7/1/08 (b) ........................ 3,640,000 AAA 3,945,068
Nuclear Project #3, Series B, 7.125%, 7/1/16 ................................ 2,500,000 AA 3,081,075
Wisconsin
Wisconsin State Health & Educational Facilities Authority National
Regency of New Berlin Project, Series 1995, 8%, 8/15/25 ...................... 1,485,000 NR 1,683,738
- -----------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $294,675,986) 329,523,178
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $301,375,986) (a) 336,223,178
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $301,375,986. At December 31,
1997, net unrealized appreciation for all securities based on tax cost was
$34,847,192. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $34,848,229 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,037.
(b) Bond is insured by one of these companies: AMBAC, BIG, Capital Guaranty,
FGIC, FSA or MBIA.
(c) All of the securities held have been determined by the Adviser to be of
the appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are assigned by either Standard & Poor's
Ratings Group, Moody's Investors Service, Inc. or Fitch Investors Service,
Inc. Securities rated by Scudder (SS&C) and unrated securities (NR) have
been determined by the Adviser to be of comparable quality to rated
securities.
(d) Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
(e) When-issued or forward delivery pools included.
(f) At December 31, 1997, these securities, in part or in whole, have been
segregated to cover when-issued or forward delivery securities.
* Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of December 31, 1997.
** Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to tax-exempt commercial paper. These securities
are payable on demand within seven calendar days and normally incorporate
an irrevocable letter of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
The accompanying notes are an integral part of the financial statements.
16 - Scudder High Yield Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of December 31, 1997
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at market (identified cost $301,375,986) .............. $ 336,223,178
Receivable for investments sold .................................... 75,000
Receivable for Fund shares sold .................................... 160,118
Interest receivable ................................................ 5,813,017
Other assets ....................................................... 4,818
----------------
Total assets ....................................................... 342,276,131
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for when-issued and forward delivery securities ............ 4,588,006
Due to custodian bank .............................................. 25,986
Dividends payable .................................................. 499,615
Payable for Fund shares redeemed ................................... 153,354
Accrued management fee ............................................. 178,106
Other payables and accrued expenses ................................ 140,330
----------------
Total liabilities .................................................. 5,585,397
-------------------------------------------------------------------------------------------
Net assets, at market value $ 336,690,734
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation on investments ......................... 34,847,192
Accumulated net realized loss ...................................... (6,922,525)
Paid-in capital .................................................... 308,766,067
-------------------------------------------------------------------------------------------
Net assets, at market value $ 336,690,734
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($336,690,734 / 26,338,299 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ...................................................... $12.78
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder High Yield Tax Free Fund
<PAGE>
Statement of Operations
year ended December 31, 1997
<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest ........................................................... $ 19,414,494
-----------------
Expenses:
Management fee ..................................................... 2,050,368
Services to shareholders ........................................... 403,819
Custodian and accounting fees ...................................... 114,695
Trustees' fees and expenses ........................................ 44,083
Reports to shareholders ............................................ 57,806
Legal .............................................................. 10,164
Auditing ........................................................... 37,449
Registration fees .................................................. 21,751
Other .............................................................. 12,006
-----------------
2,752,141
--------------------------------------------------------------------------------------------
Net investment income 16,662,353
--------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from investments .......................... 1,293,696
Net unrealized appreciation during the period on investments ....... 17,278,728
--------------------------------------------------------------------------------------------
Net gain on investment transactions 18,572,424
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 35,234,777
--------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder High Yield Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ........................................ $ 16,662,353 $ 16,407,315
Net realized gain (loss) from investment transactions ........ 1,293,696 (5,169,621)
Net unrealized appreciation on investment transactions
during the period .......................................... 17,278,728 1,246,316
-------------- ---------------
Net increase in net assets resulting from operations ......... 35,234,777 12,484,010
-------------- ---------------
Distributions to shareholders from net investment income ..... (16,662,353) (16,407,315)
-------------- ---------------
Fund share transactions:
Proceeds from shares sold .................................... 94,712,636 58,667,981
Net asset value of shares issued to shareholders in
reinvestment of distributions .............................. 10,767,421 10,795,380
Cost of shares redeemed ...................................... (80,462,768) (76,318,203)
-------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions ............................................... 25,017,289 (6,854,842)
-------------- ---------------
Increase (decrease) in net assets ............................ 43,589,713 (10,778,147)
Net assets at beginning of period ............................ 293,101,021 303,879,168
-------------- ---------------
Net assets at end of period .................................. $336,690,734 $293,101,021
-------------- ---------------
Other Information
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................... 24,338,716 24,929,576
-------------- ---------------
Shares sold .................................................. 7,700,257 4,936,365
Shares issued to shareholders in reinvestment of
distributions .............................................. 874,481 908,391
Shares redeemed .............................................. (6,575,155) (6,435,616)
-------------- ---------------
Net increase (decrease) in Fund shares ....................... 1,999,583 (590,860)
-------------- ---------------
Shares outstanding at end of period .......................... 26,338,299 24,338,716
-------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19 - Scudder High Yield Tax Free Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning ----------------------------------------------------------------------------------------
of period ................... $12.04 $12.19 $10.86 $12.55 $11.90 $11.67 $11.19 $11.35 $11.06 $10.52
Income from investment ----------------------------------------------------------------------------------------
operations:
Net investment income .......... .67 .66 .68 .70 .67 .72 .76 .77 .76 .83
Net realized and unrealized
gain (loss) on
investments ................. .74 (.15) 1.37 (1.73) .93 .50 .69 (.11) .35 .54
Total from investment ----------------------------------------------------------------------------------------
operations .................. 1.41 .51 2.05 (1.03) 1.60 1.22 1.45 .66 1.11 1.37
----------------------------------------------------------------------------------------
Less distributions:
From net investment income ..... (.67) (.66) (.72) (.66) (.67) (.72) (.76) (.77) (.76) (.83)
From net realized gains on
investment transactions ..... -- -- -- -- (.21) (.27) (.21) (.05) (.06) --
In excess of net realized
gains ....................... -- -- -- -- (.07) -- -- -- -- --
----------------------------------------------------------------------------------------
Total distributions ............ (.67) (.66) (.72) (.66) (.95) (.99) (.97) (.82) (.82) (.83)
----------------------------------------------------------------------------------------
Net asset value, end of ----------------------------------------------------------------------------------------
period ...................... $12.78 $12.04 $12.19 $10.86 $12.55 $11.90 $11.67 $11.19 $11.35 $11.06
- -------------------------------------------------------------------------------------------------------------------------
Total Return (%) ............... 12.04 4.43 19.28 (8.38) 13.85 10.88 13.36 6.02 10.32 13.48
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................ 337 293 304 260 317 204 160 129 114 74
Ratio of operating expenses,
net to average daily net
assets (%) .................. .90 .91 .80 .80 .92 .98 1.00 1.00 1.00 .67
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) .................. .90 .95 .94 .97 .98 .99 1.04 1.09 1.15 1.25
Ratio of net investment
income to average net
assets (%) .................. 5.43 5.59 5.77 6.01 5.38 6.10 6.65 6.88 6.72 7.65
Portfolio turnover rate (%) .... 33.2 21.9 27.3 34.3 56.4 56.6 45.5 33.4 75.8 36.7
</TABLE>
20 - Scudder High Yield Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder High Yield Tax Free Fund (the "Fund") is organized as a diversified
series of Scudder Municipal Trust, a Massachusetts business trust, which is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which prices reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other debt securities are valued at their fair
value as determined in good faith by the Valuation Committee of the Board of
Trustees.
When-issued and Forward Delivery Securities. The Fund may purchase securities on
a when-issued or forward delivery basis, for payment and delivery at a later
date. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
take place at a later time. At the time the Fund makes the commitment to
purchase a security on a when-issued or forward delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. During the period between purchase and settlement, no payment is
made by the Fund to the issuer and no interest accrues to the Fund. At the time
of settlement, the market value of the security may be more or less than the
purchase price. The Fund will establish a segregated account in which it will
maintain cash and liquid debt securities equal in value to commitments for
when-issued or forward delivery securities.
Amortization and Accretion. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable and tax-exempt income
to its shareholders. The Fund accordingly paid no federal income taxes and no
provision for federal income taxes was required.
At December 31, 1997, the Fund had a net tax basis capital loss carryforward of
approximately $5,050,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2004 ($5,050,000) the expiration date, whichever occurs first.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
Distributions of net realized capital gains to shareholders are recorded on the
ex-dividend date.
21 - Scudder High Yield Tax Free Fund
<PAGE>
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. As a result, net
investment income (loss) and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Fund may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment transactions are accounted for on a trade-date basis. Interest
income is accrued pro rata to the earlier of call or maturity.
B. Purchases and Sales of Securities
During the year ended December 31, 1997, purchases and sales of municipal
securities (excluding short-term investments) aggregated $126,574,028 and
$101,446,930, respectively.
C. Related Parties
Under the Investment Management Agreement between the Fund and Scudder, Stevens
& Clark, Inc. ("Scudder" or the "Adviser") which was in effect prior to August
13, 1997 (the "Agreement"), the Fund agreed to pay the Adviser an annual rate of
approximately 0.70% on the first $200,000,000 of the Fund's average daily net
assets and 0.65% of such net assets in excess of $200,000,000, computed and
accrued daily and payable monthly.
Effective August 13, 1997, the Fund, as approved by the Fund's Board of
Trustees, adopted a new Investment Management Agreement (the "Management
Agreement") with Scudder. Under the Management Agreement the Adviser directs the
investments of the Fund in accordance with its investment objective, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Management Agreement. The
management fee payable under the Management Agreement is equal to an annual rate
of approximately 0.65% on the first $300,000,000 of the Fund's average daily net
assets and 0.60% of such net assets in excess of $300,000,000, computed and
accrued daily and payable monthly.
Effective December 31, 1997, Scudder and The Zurich Insurance Company
("Zurich"), an international insurance and financial services organization,
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. As a result of the
transaction, Scudder changed its name to Scudder Kemper Investments Inc.
("Scudder Kemper"). The transaction between Scudder and Zurich resulted in the
termination of the Fund's Investment Management Agreement with Scudder. However,
a new Investment Management Agreement between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
22 - Scudder High Yield Tax Free Fund
<PAGE>
For the year ended December 31, 1997, the fee pursuant to these agreements
amounted to $2,050,368, which was equivalent to an annual effective rate of
0.67% of the Fund's average daily net assets.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1997, the amount charged to the Fund by SSC aggregated
$287,904 of which $23,216 is unpaid at December 31, 1997.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1997, the amount charged to the Fund by SFAC aggregated $60,501, of
which $5,500 is unpaid at December 31, 1997.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended December 31, 1997,
Trustees' fees and expenses aggregated $44,083.
23 - Scudder High Yield Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder Municipal Trust and the Shareholders of Scudder High
Yield Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
High Yield Tax Free Fund, including the investment portfolio, as of December 31,
1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the ten years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder High Yield Tax Free Fund as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the ten years in the period then ended, in conformity with generally accepted
accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 19, 1998
24 - Scudder High Yield Tax Free Fund
<PAGE>
Tax Information
Of the dividends paid from net investment income for the fiscal year ended
December 31, 1997, 17.71% should be treated as an item of tax preference for
purposes of the federal alternative minimum tax, if applicable. Pursuant to
section 852 of the Internal Revenue Code, the Fund designates $16,662,353 as
exempt interest dividends for the fiscal year ended December 31, 1997.
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University, College
of Business Administration
Kathryn L. Quirk*
Trustee, Vice President and Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner, Technology Equity Partners
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President, Secretary and Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
25 - SCUDDER HIGH YIELD TAX FREE FUND
<PAGE>
Tax Information
Of the dividends paid from net investment income for the fiscal year ended
December 31, 1997, 17.71% should be treated as an item of tax preference for
purposes of the federal alternative minimum tax, if applicable. Pursuant to
section 852 of the Internal Revenue Code, the Fund designates $16,662,353 as
exempt interest dividends for the fiscal year ended December 31, 1997.
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center
for Business Ethics; President,
Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
25 - Scudder High Yield Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder High Yield Tax Free
Fund (the "Fund") was held on October 24, 1997, at the offices of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. At the Meeting, as adjourned and reconvened,
the following matters were voted upon by the shareholders (the resulting votes
for each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide shareholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
16,699,020 687,762 612,156 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 17,268,151 730,789
Dawn-Marie Driscoll 17,261,525 737,415
Peter B. Freeman 17,258,451 740,488
George M. Lovejoy, Jr. 17,264,941 733,999
Dr. Wesley W. Marple, Jr. 17,253,878 745,062
Daniel Pierce 17,272,554 726,386
Kathryn L. Quirk 17,261,642 737,298
Jean C. Tempel 17,253,612 745,328
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
14,603,280 1,364,033 1,045,212 986,414
26 - Scudder High Yield Tax Free Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
15,062,556 1,091,653 1,067,500 932,339
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 14,726,371 1,104,581 1,181,573 986,414
5.2 Borrowing 14,613,896 1,221,250 1,177,379 986,414
5.3 Senior securities 14,718,335 1,105,195 1,188,996 986,414
5.4 Concentration 14,681,145 1,145,366 1,186,014 986,414
5.5 Loans 14,697,796 1,126,644 1,188,086 986,414
5.6 Underwriting of securities 14,731,414 1,098,016 1,183,095 986,414
5.7 Investment in real estate 14,720,833 1,102,194 1,189,499 986,414
5.8 Purchase of physical commodities 14,712,224 1,111,278 1,189,023 986,414
5.9 Investment in California municipal N/A N/A N/A N/A
securities
5.10 Investment in municipal securities 14,730,369 1,093,130 1,189,026 986,414
5.11 Investment in Massachusetts N/A N/A N/A N/A
municipal securities
5.12 Investment in New York municipal N/A N/A N/A N/A
securities
5.13 Investment in Ohio municipal N/A N/A N/A N/A
securities
5.14 Investment in Pennsylvania N/A N/A N/A N/A
municipal securities
27 - Scudder High Yield Tax Free Fund
<PAGE>
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
5.15 Investment in short-term municipal N/A N/A N/A N/A
securities
5.16 Elimination of tax diversification N/A N/A N/A N/A
5.17 Purchases of voting securities N/A N/A N/A N/A
5.18 Affiliated transactions N/A N/A N/A N/A
5.19 Disclosed practices 14,691,177 1,140,155 1,181,194 986,414
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
17,084,716 339,623 574,600
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
28 - Scudder High Yield Tax Free Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +++Funds within categories are listed
in order from expected least risk to most risk. Certain Scudder funds may not be
available for purchase or exchange. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *A class of shares of
the Fund. **Not available in all states. +++ +++A no-load variable annuity
contract provided by Charter National Life Insurance Company and its affiliate,
offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised
by Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange
and, in some cases, on various other stock exchanges.
29 - Scudder High Yield Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
DistributionsDirect
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
30 - Scudder High Yield Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 6,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
31 - Scudder High Yield Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
[LOGO]
SCUDDER MUNICIPAL TRUST
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a. Financial Statements
Included in Part A:
Scudder Managed Municipal Bonds
Financial highlights for the ten fiscal years ended December
31, 1997.
Included in Part A:
Scudder High Yield Tax Free Fund
Financial highlights for the (commencement of operations) ten
fiscal years ended December 31, 1997.
Included in Part B:
Scudder Managed Municipal Bonds
Investment Portfolio as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the fiscal year ended December 31,
1997
Statements of Changes in Net Assets for the two fiscal years
ended December 31, 1997
Financial Highlights for the ten fiscal years ended December
31, 1997
Notes to Financial Statements
Report of Independent Accountants
Included in Part B:
Scudder High Yield Tax Free Fund
Investment Portfolio as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statements of Changes in Net Assets for the three fiscal years
ended December 31, 1997
Financial Highlights for the ten fiscal years ended December
31, 1997.
Notes to Financial Statements
Report of Independent Accountants
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable
or are not required.
All references to the Registration Statement are to the
Registrant's Registration Statement on Form N-1A as filed with
the Securities and Exchange Commission. File Nos. 2-57139 and
811-2671 (the "Registration Statement").
Part C - Page 1
<PAGE>
b. Exhibits:
1. (a)(1) Amended and Restated Declaration of Trust
dated December 8, 1987.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(a)(2) Amendment to Amended and Restated
Declaration of Trust dated December 11, 1990.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(b) Instrument dated October 29, 1986
Establishing and Designating an Additional
Series of Shares.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(c) Establishment and Designation of Series
dated November 6, 1987.
2. (a) By-laws of the Registrant dated September
24, 1976 as amended through December 31, 1979.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(b) Amendment to the By-Laws of Registrant as
amended through December 8, 1987.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(c) Amendment to the By-Laws of Registrant dated
August 13, 1991.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(d) Amendment to the By-Laws of Registrant dated
December 10, 1991.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
3. Inapplicable.
4. Inapplicable.
5. (a) Investment Management Agreement between the
Registrant (on behalf of Scudder Managed
Municipal Bonds) and Scudder, Stevens &
Clark, Inc. dated December 12, 1990.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(b) Investment Management Agreement between the
Registrant (on behalf of Scudder High Yield
Tax Free Fund) and Scudder, Stevens & Clark,
Inc. dated December 12, 1990.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
Part C - Page 2
<PAGE>
(c) Investment Management Agreement between the
Registrant (on behalf of Scudder Managed
Municipal Bonds) and Scudder, Stevens &
Clark, Inc. dated August 10, 1993.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(d) Investment Management Agreement between the
Registrant (on behalf of Scudder Managed
Municipal Bonds) and Scudder Kemper
Investments, Inc. dated December 31, 1997.
(e) Investment Management Agreement between the
Registrant (on behalf of Scudder High Yield
Tax Free Fund) and Scudder Kemper
Investments, Inc. dated December 31, 1997.
6. Underwriting Agreement between the
Registrant and Scudder Investor Services,
Inc., formerly Scudder Fund Distributors,
Inc. dated January 12, 1987.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
7. Inapplicable.
8. (a)(1) Custodian Agreement between the Registrant
and State Street Bank and Trust Company
dated March 17, 1980.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(a)(2) Fee schedule for Exhibit 8(a)(1).
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(a)(3) Amendment No. 1 to the Custodian Agreement
between the Registrant and State Street Bank
and Trust Company dated March 17, 1980.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(a)(4) Amendment to the Custodian Contract between
the Registrant and State Street Bank and
Trust Company dated August 9, 1988.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(a)(5) Amendment to the Custodian Contract between
the Registrant and State Street Bank and
Trust Company dated December 11, 1990.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(b) Subcustodian Agreement and Fee Schedule
between State Street Bank and Trust Company
and The Bank of New York, London office,
dated December 31, 1978.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(c) Subcustodian Agreement between Irving Trust
Company and State Street Bank and Trust
Company dated November 30, 1987.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
Part C - Page 3
<PAGE>
(d) Subcustodian Agreement between State Street
Bank and Trust Company and Morgan Guaranty
Trust Company of New York dated November 25,
1985.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(e) Subcustodian Agreement between Chemical Bank
and State Street Bank and Trust Company
dated May 31, 1988.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(f) Subcustodian Agreement between Security
Pacific National Bank and Trust Company (New
York) and State Street Bank and Trust
Company dated February 18, 1988.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(g) Subcustodian Agreement between Bankers Trust
Company and State Street Bank and Trust
Company dated August 15, 1989.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(h) Fee Schedule for Exhibit 8(a)(1) is
incorporated by reference to Post-Effective
Amendment No. 29.
9. (a)(1) Transfer Agency, Service Agreement and Fee
Schedule between the Registrant and Scudder
Service Corporation dated October 2, 1989.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
(a)(2) Revised Fee Schedule dated October 1, 1995
for Exhibit 9 (a)(1). (Incorporated by
reference to Post-Effective Amendment No. 30
to the Registration Statement.)
(a)(3) Fund Accounting Services Agreement between
the Registrant, on behalf of Scudder High
Yield Tax Free Fund, and Scudder Fund
Accounting Corporation dated January 23, 1995.
(Incorporated by reference to Post-Effective
Amendment No. 29.)
(a)(4) Fund Accounting Services Agreement between
the Registrant, on behalf of Scudder Managed
Municipal Bonds, and Scudder Fund Accounting
Corporation dated February 9, 1995.
(Incorporated by reference to Post-Effective
Amendment No. 29.)
(a)(5) Revised Fee Schedule for Exhibit 9(a)(1)
dated October 1, 1996. (Incorporated by
reference to Post-Effective Amendment No. 32.)
(b) Inapplicable.
10. Inapplicable.
11. Consent of Independent Accountants is filed
herein.
Part C - Page 4
<PAGE>
12. Inapplicable.
13. Inapplicable.
14. Scudder Roth IRA Plan is filed herein.
15. Inapplicable.
16. Schedule for Computation of Performance
Quotation.
(Incorporated by Reference to Post-Effective
Amendment No. 34 to the Registration
Statement.)
17. Financial Data Schedules are filed herein.
18. Power of Attorney for David S. Lee, Henry P.
Becton, Jr., Dawn-Marie Driscoll, Peter B.
Freeman, Dudley H. Ladd, George M. Lovejoy,
Jr., Wesley W. Marple, Jr., Juris Padegs,
and Daniel Pierce is incorporated by
reference to the Signature Page of
Post-Effective Amendment No. 24.
Power of Attorney for Kathryn L. Quirk is
incorporated by reference to signature page
of Post-Effective Amendment No. 32.
Power of Attorney for Jean C. Tempel is
incorporated by reference to signature page
of Post-Effective Amendment No. 33.
Item 25. Persons Controlled by or under Common Control with Registrant.
None
Item 26. Number of Holders of Securities (as of February 10, 1998).
(1) (2)
Title of Class Number of Shareholders
-------------- ----------------------
Scudder Managed 10,752
Municipal Bonds
shares of beneficial
interest
($ .01 par value)
Scudder High Yield Tax 9,612
Free Fund shares of
beneficial interest
($ .01 par value)
Item 27. Indemnification.
A policy of insurance covering Scudder Kemper Investments, Inc., its
subsidiaries including Scudder Investor Services, Inc., and all of
the registered investment companies advised by Scudder, Stevens &
Clark, Inc. insures the Registrant's Trustees and officers and
others against liability arising by reason of an alleged breach of
duty caused by any negligent act, error or accidental omission in
the scope of their duties.
Article IV, sections 4.1-4.3 of Registrant's Declaration of Trust
provide as follows:
Section 4.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder shall be subject to any personal liability whatsoever to
any Person in connection with Trust Property or the acts,
Part C - Page 5
<PAGE>
obligations or affairs of the Trust. No Trustee, officer, employee
or agent of the Trust shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its
Shareholders, in connection with Trust Property or the affairs of
the Trust, save only that arising from bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties
with respect to such Person; and all such Persons shall look solely
to the Trust Property for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the
Trust, is made a party to any suit or proceeding to enforce any such
liability of the Trust, he shall not, on account thereof, be held to
any personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities, to
which such Shareholder may become subject by reason of his being or
having been a Shareholder, and shall reimburse such Shareholder for
all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made only
out of the assets of the one or more series of which the Shareholder
who is entitled to indemnification or reimbursement was a
Shareholder at the time the act or event occurred which gave rise to
the claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not impair
any other right to which such Shareholder may be lawfully entitled,
nor shall anything herein contained restrict the right of the Trust
to indemnify or reimburse a Shareholder in any appropriate situation
even though not specifically provided herein.
Section 4.2 Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee, or
agent thereof for any action or failure to act (including without
limitation the failure to compel in any way any former or acting
Trustee to redress any breach of trust) except for his own bad
faith, willful misfeasance, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Section 4.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is, or has been, a Trustee or officer
of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability
and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings
(civil, criminal, administrative, or other, including
appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a series thereof, or
the Shareholders by reason of a final adjudication by a
court or other body before which a proceeding was
brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph
(b)(i)(b)(ii) resulting in a payment by a Trustee or
officer,
Part C - Page 6
<PAGE>
unless there has been a determination that such Trustee
or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available facts (as
opposed to a full trial-type inquiry) by (x) vote
of a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent
legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described
in paragraph (a) of this Section 4.3 may be advanced by the
Trust prior to final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled
to indemnification under this Section 4.3 provided that
either:
(i) such undertaking is secured by a surety bond or some
other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of
any such advances: or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal
counsel in a written opinion shall determine, based upon
a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to
believe that the recipient ultimately will be found
entitled to indemnification. As used in this Section
4.3, a "Disinterested Trustee" is one who is not (i) an
"Interested Person" of the Trust (including anyone who
has been exempted from being an "Interested Person" by
any rule, regulation or order of the Commission), or
(ii) involved in the claim, action, suit or proceeding.
Item 28. Business or Other Connections of Investment Adviser
Scudder Kemper Investments, Inc. has stockholders and employees who
are denominated officers but do not as such have corporation-wide
responsibilities. Such persons are not considered officers for the
purpose of this Item 28.
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
Stephen R. Treasurer and Chief Financial Officer, Scudder Kemper
Beckwith Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting
Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution
Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning
Corporation**
Part C - Page 7
<PAGE>
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments,
Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A. #
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland ##
Director, ZKI Holding Corporation xx
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland ##
Director, Zurich Holding Company of America o
Rolf Huppi Director, Chairman of the Board, Scudder Kemper
Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of
America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and
Secretary, Scudder Kemper Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder
Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund
Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty
Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder
Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens &
Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada
Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty
Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark
Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas
Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined
Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital
Asset Corporation**
Director, Vice President and Secretary, Scudder Capital
Stock Corporation**
Director, Vice President and Secretary, Scudder Capital
Planning Corporation**
Director, Vice President and Secretary, SS&C Investment
Corporation**
Director, Vice President and Secretary, SIS Investment
Corporation**
Director, Vice President and Secretary, SRV Investment
Corporation**
Director, Vice President and Secretary, Scudder Brokerage
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Markus Rohrbasser Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company
of Switzerland ##
President, Director, Chairman of the Board, ZKI Holding
Corporation xx
Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder
Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas
Corporation oo
President and Director, Scudder, Stevens & Clark
Corporation**
Director, Scudder Realty Advisors, Inc. x
Part C - Page 8
<PAGE>
Director, IBJ Global Investment Management S.A. Luxembourg,
Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 29. Principal Underwriters.
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other funds
managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of this
Item 29.
(1) (2) (3)
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
William S. Baughman Vice President None
Two International Place
Boston, MA 02110
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and None
Two International Place Assistant Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice None
Two International Place President
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
</TABLE>
Part C - Page 9
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Paul J. Elmlinger Senior Vice President and None
345 Park Avenue Assistant Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Vice President
Two International Place Treasurer and Assistant Clerk
Boston, MA 02110
Thomas F. McDonough Clerk Vice President,
Two International Place Secretary and
Boston, MA 02110 Treasurer
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President Trustee, Vice
345 Park Avenue and Assistant Clerk President and
New York, NY 10154 Assistant Secretary
Robert A. Rudell Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
</TABLE>
Part C - Page 10
<PAGE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper Investments,
Inc., Two International Place, Boston, MA 02110. Records relating to
the duties of the Registrant's custodian are maintained by State
Street Bank and Trust Company, Heritage Drive, North Quincy,
Massachusetts.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
Inapplicable.
Part C - Page 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 27th day of February, 1998.
SCUDDER MUNICIPAL TRUST
By /s/ Thomas F. McDonough
----------------------------------
Thomas F. McDonough, Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Daniel Pierce
- ----------------
Daniel Pierce* President (Principal February 27,1998
Executive Officer)
and Trustee
/s/Henry P. Becton, Jr.
- -----------------------
Henry P. Becton, Jr.* Trustee February 27,1998
/s/Dawn-Marie Driscoll
- ----------------------
Dawn-Marie Driscoll* Trustee February 27,1998
Peter B. Freeman
- ----------------
Peter B. Freeman* Trustee February 27,1998
/s/George M. Lovejoy, Jr.
- -------------------------
George M. Lovejoy, Jr.* Trustee February 27,1998
/s/Wesley W. Marple, Jr.
- ------------------------
Wesley W. Marple, Jr.* Trustee February 27,1998
/s/Kathryn L. Quirk
- -------------------
Kathryn L. Quirk* Vice President and February 27,1998
Trustee
/s/Jean C. Tempel
- -----------------
Jean C. Tempel* Trustee February 27,1998
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/John R. Hebble
- -----------------
John R. Hebble Assistant Treasurer February 27,1998
(Principal Financial
and Accounting
Officer)
*By: /s/Thomas F. McDonough
----------------------
Thomas F. McDonough
Attorney-in-fact pursuant to power of
attorney contained in the signature page of
Post-Effective Amendment No. 24 to the
Registration Statement filed on
February 25, 1991, Post-Effective
Amendment No. 32 filed on April 29, 1997,
and Post-Effective Amendment No. 33 to
the Registration Statement on November 4,
1997.
2
<PAGE>
File No. 2-57139
File No. 811-2671
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 35
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 26
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER MUNICIPAL TRUST
<PAGE>
SCUDDER MUNICIPAL TRUST
EXHIBIT INDEX
Exhibit 5(d)
Exhibit 5(e)
Exhibit 11
Exhibit 14
Exhibit 17
Scudder Municipal Trust
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder Managed Municipal Bonds
Ladies and Gentlemen:
Scudder Municipal Trust (the "Trust") has been established as a
Massachusetts business trust to engage in the business of an investment company.
Pursuant to the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees has divided the Trust's shares of
beneficial interest, par value $0.01 per share, (the "Shares") into separate
series, or funds, including Scudder Managed Municipal Bonds (the "Fund"). Series
may be abolished and dissolved, and additional series established, from time to
time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the sole
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the Fund
agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of investing
and reinvesting the assets of the Fund in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Fund included in the Trust's Registration Statement
on Form N-1A, as amended from time to time, (the "Registration Statement") filed
by the Trust under the Investment Company Act of 1940, as amended, (the "1940
Act") and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to you by the Trust.
The Trust has also furnished you with copies properly certified or authenticated
of each of the following additional documents related to the Trust and the Fund:
(a) The Declaration dated December 8, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By- Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of the Fund
selecting you as investment manager and approving the form of this
Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated November 3, 1987 relating to the Fund.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Trust's name
(the "Fund Name"), and (ii) the Scudder Marks in connection with the Trust's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Trust's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Trust shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Trust further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable request, the Trust
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust, or you no longer are a
licensee of the Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name indicating
that it is advised by, managed by or otherwise connected with you (or any
organization which shall have succeeded to your business as investment manager)
or the Trademark Owner. In no event shall the Trust use the Scudder Marks or any
other name or mark confusingly similar thereto (including, but not limited to,
any name or mark that includes the name "Scudder") if this Agreement or any
other investment advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund, you
shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable efforts to manage
the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel to the Trust or counsel to
you. You shall also make available to the Trust promptly upon request all of the
2
<PAGE>
Fund's investment records and ledgers as are necessary to assist the Trust in
complying with the requirements of the 1940 Act and other applicable laws. To
the extent required by law, you shall furnish to regulatory authorities having
the requisite authority any information or reports in connection with the
services provided pursuant to this Agreement which may be requested in order to
ascertain whether the operations of the Trust are being conducted in a manner
consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers, foreign currency dealers, futures commission merchants or
others pursuant to your determinations and all in accordance with Fund policies
as expressed in the Registration Statement. You shall determine what portion of
the Fund's portfolio shall be invested in securities and other assets and what
portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on the
investment performance of the Fund and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Trust's officers or Board of Trustees shall reasonably
request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Trust administrative services
on behalf of the Fund necessary for operating as an open- end investment company
and not provided by persons not parties to this Agreement including, but not
limited to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents and
pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; assisting in establishing the accounting policies of the Fund;
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and otherwise assisting the Trust as
it may reasonably request in the conduct of the Fund's business, subject to the
direction and control of the Trust's Board of Trustees. Nothing in this
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Agreement shall be deemed to shift to you or to diminish the obligations of any
agent of the Fund or any other person not a party to this Agreement which is
obligated to provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your directors,
officers and employees as may duly be elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law. You
shall provide at your expense the portfolio management services described in
section 3 hereof and the administrative services described in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 5. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out-of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Fund (or some
other party) shall assume some or all of such expenses. You shall be required to
pay such of the foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund (or some other party) pursuant to such a plan.
4
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6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Trust
on behalf of the Fund shall pay you in United States Dollars on the last day of
each month the unpaid balance of a fee equal to the excess of 1/12 of 0.55 of 1
percent of the average daily net assets as defined below of the Fund for such
month; provided that, for any calendar month during which the average of such
values exceeds $200 million, the fee payable for that month based on the portion
of the average of such values in excess of $200 million shall be 1/12 of 0.50 of
1 percent of such portion; and provided that, for any calendar month during
which the average of such values exceeds $700 million, the fee payable for that
month based on the portion of the average of such values in excess of $700
million shall be 1/12 of 0.475 of 1 percent of such portion; over any
compensation waived by you from time to time (as more fully described below).
You shall be entitled to receive during any month such interim payments of your
fee hereunder as you shall request, provided that no such payment shall exceed
75 percent of the amount of your fee then accrued on the books of the Fund and
unpaid.
The "average daily net assets" of the Fund shall mean the average of the
values placed on the Fund's net assets as of 4:00 p.m. (New York time) on each
day on which the net asset value of the Fund is determined consistent with the
provisions of Rule 22c- 1 under the 1940 Act or, if the Fund lawfully determines
the value of its net assets as of some other time on each business day, as of
such time. The value of the net assets of the Fund shall always be determined
pursuant to the applicable provisions of the Declaration and the Registration
Statement. If the determination of net asset value does not take place for any
particular day, then for the purposes of this section 6, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of 4:00 p.m. (New York time), or as of such other time as the value of
the net assets of the Fund's portfolio may be lawfully determined on that day.
If the Fund determines the value of the net assets of its portfolio more than
once on any day, then the last such determination thereof on that day shall be
deemed to be the sole determination thereof on that day for the purposes of this
section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be deemed
to be exclusive and it is understood that you may render investment advice,
management and services to others. In acting under this Agreement, you shall be
an independent contractor and not an agent of the Trust. Whenever the Fund and
one or more other accounts or investment companies advised by the Manager have
available funds for investment, investments suitable and appropriate for each
shall be allocated in accordance with procedures believed by the Manager to be
equitable to each entity. Similarly, opportunities to sell securities shall be
allocated in a manner believed by the Manager to be equitable. The Fund
recognizes that in some cases this procedure may adversely affect the size of
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the position that may be acquired or disposed of for the Fund.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Trust agrees that you shall
not be liable under this Agreement for any error of judgment or mistake of law
or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing in this Agreement shall be deemed
to protect or purport to protect you against any liability to the Trust, the
Fund or its shareholders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties, or by reason of your reckless disregard of your obligations and duties
hereunder. Any person, even though also employed by you, who may be or become an
employee of and paid by the Fund shall be deemed, when acting within the scope
of his or her employment by the Fund, to be acting in such employment solely for
the Fund and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Trust, or by the vote of a majority of the outstanding
voting securities of the Fund. The aforesaid requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Trust's Board of Trustees on 60 days'
written notice to you, or by you on 60 days' written notice to the Trust. This
Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Scudder Municipal
Trust" refers to the Trustees under the Declaration collectively as Trustees and
not as individuals or personally, and that no shareholder of the Fund, or
Trustee, officer, employee or agent of the Trust, shall be subject to claims
against or obligations of the Trust or of the Fund to any extent whatsoever, but
that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Trust on behalf of the Fund pursuant to this Agreement shall be limited in all
cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
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other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Trust on behalf of the Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER MUNICIPAL TRUST, on
behalf of
Scudder Managed Municipal
Bonds
By:
----------------------------------
President
The foregoing Agreement is hereby accepted as of the date
hereof.
SCUDDER KEMPER INVESTMENTS,
INC.
By:
-----------------------------------
Managing Director
7
Scudder Municipal Trust
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder High Yield Tax Free Fund
Ladies and Gentlemen:
Scudder Municipal Trust (the "Trust") has been established
as a Massachusetts business trust to engage in the business of an
investment company. Pursuant to the Trust's Declaration of Trust,
as amended from time-to-time (the "Declaration"), the Board of
Trustees has divided the Trust's shares of beneficial interest,
par value $0.01 per share, (the "Shares") into separate series,
or funds, including Scudder High Yield Tax Free Fund (the
"Fund"). Series may be abolished and dissolved, and additional
series established, from time to time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as
the sole investment manager of the Fund and to provide certain
other services, as more fully set forth below, and you have
indicated that you are willing to act as such investment manager
and to perform such services under the terms and conditions
hereinafter set forth. Accordingly, the Trust on behalf of the
Fund agrees with you as follows:
1. Delivery of Documents. The Trust engages in the
business of investing and reinvesting the assets of the Fund in
the manner and in accordance with the investment objectives,
policies and restrictions specified in the currently effective
Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the
Trust's Registration Statement on Form N-1A, as amended from time
to time, (the "Registration Statement") filed by the Trust under
the Investment Company Act of 1940, as amended, (the "1940 Act")
and the Securities Act of 1933, as amended. Copies of the
documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you
with copies properly certified or authenticated of each of the
following additional documents related to the Trust and the Fund:
(a) The Declaration dated December 8, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-
Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders
of the Fund selecting you as investment manager and approving
the form of this Agreement.
(d) Establishment and Designation of Series of Shares of
Beneficial Interest dated November 3, 1987 relating to the
Fund.
The Trust will furnish you from time to time with copies,
properly certified or authenticated, of all amendments of or
supplements, if any, to the foregoing, including the Prospectus,
the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive
licensee of the rights to use and sublicense the use of the
"Scudder," "Scudder Kemper Investments, Inc." and "Scudder,
Stevens & Clark, Inc." trademarks (together, the "Scudder
Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the
Trust's name (the "Fund Name"), and (ii) the Scudder Marks in
connection with the Trust's investment products and services, in
each case only for so long as this Agreement, any other
investment management agreement between you and the Trust, or any
extension, renewal or amendment hereof or thereof remains in
effect, and only for so long as you are a licensee of the Scudder
Marks, provided however, that you agree to use your best efforts
to maintain your license to use and sublicense the Scudder Marks.
The Trust agrees that it shall have no right to sublicense or
assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that
all of the Trust's uses of the Scudder Marks shall inure to the
benefit of Scudder Trust Company as owner and licensor of the
Scudder Marks (the "Trademark Owner"), and that the Trust shall
not challenge the validity of the Scudder Marks or the Trademark
Owner's ownership thereof. The Trust further agrees that all
services and products it offers in connection with the Scudder
Marks shall meet commercially reasonable standards of quality, as
may be determined by you or the Trademark Owner from time to
time, provided that you acknowledge that the services and
products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable
request, the Trust shall cooperate with you and the Trademark
Owner and shall execute and deliver any and all documents
necessary to maintain and protect (including but not limited to
in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At
such time as this Agreement or any other investment management
agreement shall no longer be in effect between you (or your
successor) and the Trust, or you no longer are a licensee of the
Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name
indicating that it is advised by, managed by or otherwise
connected with you (or any organization which shall have
succeeded to your business as investment manager) or the
Trademark Owner. In no event shall the Trust use the Scudder
Marks or any other name or mark confusingly similar thereto
(including, but not limited to, any name or mark that includes
the name "Scudder") if this Agreement or any other investment
advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets
of the Fund, you shall provide continuing investment management
of the assets of the Fund in accordance with the investment
objectives, policies and restrictions set forth in the Prospectus
and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating
to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and
regulations of which you have knowledge; subject always to
policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable
efforts to manage the Fund so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations
issued thereunder. The Fund shall have the benefit of the
investment analysis and research, the review of current economic
conditions and trends and the consideration of long-range
investment policy generally available to your investment advisory
clients. In managing the Fund in accordance with the requirements
set forth in this section 3, you shall be entitled to receive and
act upon advice of counsel to the Trust or counsel to you. You
shall also make available to the Trust promptly upon request all
of the Fund's investment records and ledgers as are necessary to
assist the Trust in complying with the requirements of the 1940
Act and other applicable laws. To the extent required by law, you
shall furnish to regulatory authorities having the requisite
authority any information or reports in connection with the
services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the
Trust are being conducted in a manner consistent with applicable
laws and regulations.
You shall determine the securities, instruments,
investments, currencies, repurchase agreements, futures, options
and other contracts relating to investments to be purchased, sold
or entered into by the Fund and place orders with broker-dealers,
foreign currency dealers, futures commission merchants or others
pursuant to your determinations and all in accordance with Fund
policies as expressed in the Registration Statement. You shall
determine what portion of the Fund's portfolio shall be invested
in securities and other assets and what portion, if any, should
be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic
reports on the investment performance of the Fund and on the
performance of your obligations pursuant to this Agreement, and
you shall supply such additional reports and information as the
Trust's officers or Board of Trustees shall reasonably request.
4. Administrative Services. In addition to the portfolio
management services specified above in section 3, you shall
furnish at your expense for the use of the Fund such office space
and facilities in the United States as the Fund may require for
its reasonable needs, and you (or one or more of your affiliates
designated by you) shall render to the Trust administrative
services on behalf of the Fund necessary for operating as an open-
end investment company and not provided by persons not parties to
this Agreement including, but not limited to, preparing reports
to and meeting materials for the Trust's Board of Trustees and
reports and notices to Fund shareholders; supervising,
negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting
agents, custodians, depositories, transfer agents and pricing
agents, accountants, attorneys, printers, underwriters, brokers
and dealers, insurers and other persons in any capacity deemed to
be necessary or desirable to Fund operations; preparing and
making filings with the Securities and Exchange Commission (the
"SEC") and other regulatory and self-regulatory organizations,
including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration
Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of
proxies by the Fund's transfer agent; assisting in the
preparation and filing of the Fund's federal, state and local tax
returns; preparing and filing the Fund's federal excise tax
return pursuant to Section 4982 of the Code; providing assistance
with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net
asset value; monitoring the registration of Shares of the Fund
under applicable federal and state securities laws; maintaining
or causing to be maintained for the Fund all books, records and
reports and any other information required under the 1940 Act, to
the extent that such books, records and reports and other
information are not maintained by the Fund's custodian or other
agents of the Fund; assisting in establishing the accounting
policies of the Fund; assisting in the resolution of accounting
issues that may arise with respect to the Fund's operations and
consulting with the Fund's independent accountants, legal counsel
and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets;
reviewing the Fund's bills; processing the payment of bills that
have been approved by an authorized person; assisting the Fund in
determining the amount of dividends and distributions available
to be paid by the Fund to its shareholders, preparing and
arranging for the printing of dividend notices to shareholders,
and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and
distributions; and otherwise assisting the Trust as it may
reasonably request in the conduct of the Fund's business, subject
to the direction and control of the Trust's Board of Trustees.
Nothing in this Agreement shall be deemed to shift to you or to
diminish the obligations of any agent of the Fund or any other
person not a party to this Agreement which is obligated to
provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise
specifically provided in this section 5, you shall pay the
compensation and expenses of all Trustees, officers and executive
employees of the Trust (including the Fund's share of payroll
taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of
your directors, officers and employees as may duly be elected
officers of the Trust, subject to their individual consent to
serve and to any limitations imposed by law. You shall provide at
your expense the portfolio management services described in
section 3 hereof and the administrative services described in
section 4 hereof.
You shall not be required to pay any expenses of the Fund
other than those specifically allocated to you in this section 5.
In particular, but without limiting the generality of the
foregoing, you shall not be responsible, except to the extent of
the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund:
organization expenses of the Fund (including out-of-pocket
expenses, but not including your overhead or employee costs);
fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses;
maintenance of books and records which are required to be
maintained by the Fund's custodian or other agents of the Trust;
telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment
company trade organizations; fees and expenses of the Fund's
accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio
pricing or valuation services to pricing agents, accountants,
bankers and other specialists, if any; expenses of preparing
share certificates and, except as provided below in this section
5, other expenses in connection with the issuance, offering,
distribution, sale, redemption or repurchase of securities issued
by the Fund; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Fund
for sale; interest charges, bond premiums and other insurance
expense; freight, insurance and other charges in connection with
the shipment of the Fund's portfolio securities; the compensation
and all expenses (specifically including travel expenses relating
to Trust business) of Trustees, officers and employees of the
Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any
portfolio securities of the Fund; expenses of printing and
distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the
Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust;
costs of shareholders' and other meetings; and travel expenses
(or an appropriate portion thereof) of Trustees and officers of
the Trust who are directors, officers or employees of you to the
extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New
York, New York.
You shall not be required to pay expenses of any activity
which is primarily intended to result in sales of Shares of the
Fund if and to the extent that (i) such expenses are required to
be borne by a principal underwriter which acts as the distributor
of the Fund's Shares pursuant to an underwriting agreement which
provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act
providing that the Fund (or some other party) shall assume some
or all of such expenses. You shall be required to pay such of the
foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or
are not permitted to be paid by the Fund (or some other party)
pursuant to such a plan.
6. Management Fee. For all services to be rendered,
payments to be made and costs to be assumed by you as provided in
sections 3, 4 and 5 hereof, the Trust on behalf of the Fund shall
pay you in United States Dollars on the last day of each month
the unpaid balance of a fee equal to the excess of 1/12 of 0.65
of 1 percent of the average daily net assets as defined below of
the Fund for such month; provided that, for any calendar month
during which the average of such values exceeds $300 million, the
fee payable for that month based on the portion of the average of
such values in excess of $300 million shall be 1/12 of 0.60 of 1
percent of such portion over any compensation waived by you from
time to time (as more fully described below). You shall be
entitled to receive during any month such interim payments of
your fee hereunder as you shall request, provided that no such
payment shall exceed 75 percent of the amount of your fee then
accrued on the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the
average of the values placed on the Fund's net assets as of 4:00
p.m. (New York time) on each day on which the net asset value of
the Fund is determined consistent with the provisions of Rule 22c-
1 under the 1940 Act or, if the Fund lawfully determines the
value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund
shall always be determined pursuant to the applicable provisions
of the Declaration and the Registration Statement. If the
determination of net asset value does not take place for any
particular day, then for the purposes of this section 6, the
value of the net assets of the Fund as last determined shall be
deemed to be the value of its net assets as of 4:00 p.m. (New
York time), or as of such other time as the value of the net
assets of the Fund's portfolio may be lawfully determined on that
day. If the Fund determines the value of the net assets of its
portfolio more than once on any day, then the last such
determination thereof on that day shall be deemed to be the sole
determination thereof on that day for the purposes of this
section 6.
You may waive all or a portion of your fees provided for
hereunder and such waiver shall be treated as a reduction in
purchase price of your services. You shall be contractually bound
hereunder by the terms of any publicly announced waiver of your
fee, or any limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not
Exclusive. In connection with purchases or sales of portfolio
securities and other investments for the account of the Fund,
neither you nor any of your directors, officers or employees
shall act as a principal or agent or receive any commission. You
or your agent shall arrange for the placing of all orders for the
purchase and sale of portfolio securities and other investments
for the Fund's account with brokers or dealers selected by you in
accordance with Fund policies as expressed in the Registration
Statement. If any occasion should arise in which you give any
advice to clients of yours concerning the Shares of the Fund, you
shall act solely as investment counsel for such clients and not
in any way on behalf of the Fund.
Your services to the Fund pursuant to this Agreement are not
to be deemed to be exclusive and it is understood that you may
render investment advice, management and services to others. In
acting under this Agreement, you shall be an independent
contractor and not an agent of the Trust. Whenever the Fund and
one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable
and appropriate for each shall be allocated in accordance with
procedures believed by the Manager to be equitable to each
entity. Similarly, opportunities to sell securities shall be
allocated in a manner believed by the Manager to be equitable.
The Fund recognizes that in some cases this procedure may
adversely affect the size of the position that may be acquired or
disposed of for the Fund.
8. Limitation of Liability of Manager. As an inducement to
your undertaking to render services pursuant to this Agreement,
the Trust agrees that you shall not be liable under this
Agreement for any error of judgment or mistake of law or for any
loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any
liability to the Trust, the Fund or its shareholders to which you
would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your duties, or
by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Fund shall be
deemed, when acting within the scope of his or her employment by
the Fund, to be acting in such employment solely for the Fund and
not as your employee or agent.
9. Duration and Termination of This Agreement. This
Agreement shall remain in force until September 30, 1998, and
continue in force from year to year thereafter, but only so long
as such continuance is specifically approved at least annually
(a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the Trustees of the Trust, or
by the vote of a majority of the outstanding voting securities of
the Fund. The aforesaid requirement that continuance of this
Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules
and regulations thereunder and any applicable SEC exemptive order
therefrom.
This Agreement may be terminated with respect to the Fund at
any time, without the payment of any penalty, by the vote of a
majority of the outstanding voting securities of the Fund or by
the Trust's Board of Trustees on 60 days' written notice to you,
or by you on 60 days' written notice to the Trust. This Agreement
shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this
Agreement may be changed, waived, discharged or terminated
orally, but only by an instrument in writing signed by the party
against whom enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall
be effective until approved in a manner consistent with the 1940
Act and rules and regulations thereunder and any applicable SEC
exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a
copy of which, together with all amendments thereto, is on file
in the Office of the Secretary of the Commonwealth of
Massachusetts, provides that the name "Scudder Municipal Trust"
refers to the Trustees under the Declaration collectively as
Trustees and not as individuals or personally, and that no
shareholder of the Fund, or Trustee, officer, employee or agent
of the Trust, shall be subject to claims against or obligations
of the Trust or of the Fund to any extent whatsoever, but that
the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of
liability as set forth in the Declaration and you agree that the
obligations assumed by the Trust on behalf of the Fund pursuant
to this Agreement shall be limited in all cases to the Fund and
its assets, and you shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund
or any other series of the Trust, or from any Trustee, officer,
employee or agent of the Trust. You understand that the rights
and obligations of each Fund, or series, under the Declaration
are separate and distinct from those of any and all other series.
12. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define
or limit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the
definitions contained in Section 2(a) of the 1940 Act
(particularly the definitions of "affiliated person,"
"assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied,
subject, however, to such exemptions as may be granted by the SEC
by any rule, regulation or order.
This Agreement shall be construed in accordance with the
laws of the Commonwealth of Massachusetts, provided that nothing
herein shall be construed in a manner inconsistent with the 1940
Act, or in a manner which would cause the Fund to fail to comply
with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory
or management agreements entered into between you and the Trust
on behalf of the Fund.
If you are in agreement with the foregoing, please execute
the form of acceptance on the accompanying counterpart of this
letter and return such counterpart to the Trust, whereupon this
letter shall become a binding contract effective as of the date
of this Agreement.
Yours very truly,
SCUDDER MUNICIPAL TRUST, on
behalf of
Scudder High Yield Tax Free
Fund
By:
______________________________
President
The foregoing Agreement is hereby accepted as of the date
hereof.
SCUDDER KEMPER INVESTMENTS,
INC.
By:
______________________________
Managing Director
IRA Custodian Disclosure Statement and Plan Agreement
<PAGE>
CUSTODIAN DISCLOSURE
STATEMENT
The following information is provided to you by the Custodian (as specified
on the Scudder IRA application or Scudder Brokerage IRA application) of the
Scudder Individual Retirement Account, as required by the Internal Revenue Code.
You should read this information along with the Individual Retirement Account
Custodial Agreement and the prospectus(es) and/or other information for the
investments you have selected for your IRA contributions. If there is any
inconsistency between the provisions of your plan or a prospectus and this
Statement, the plan and the prospectus provisions will control.
REVOCATION OF YOUR IRA
If you have not received this Disclosure Statement at least seven calendar
days before your IRA has been established, you have the right to revoke your IRA
during the seven calendar days after your IRA was established. To revoke your
IRA, you must request the revocation in writing and send or deliver it to:
Scudder Trust Company Trust Department Two International Place Boston, MA 02110
If you mail your revocation, the postmark must be within the seven-day
period during which you are permitted to revoke your IRA. If you revoke your IRA
within the proper time, the entire amount that you contributed, without any
adjustments for administrative fees, expenses, price fluctuation, or earnings,
will be returned to you. You may obtain further IRA information from any
district office of the Internal Revenue Service.
IRA TYPES
Within this Disclosure Statement, the IRA types which are addressed are as
follows:
Traditional IRA
A Traditional IRA is an IRA to which you make regular deductible or
non-deductible contributions or your employer makes Simplified Employee Pension
Plan (SEP) IRA contributions.
Roth IRA
A Roth IRA is an IRA to which you make regular non-deductible contributions
and from which distributions are tax and penalty free if certain conditions are
met.
Conversion Roth IRA
A Conversion Roth IRA is a Roth IRA to which you convert a Traditional IRA.
<PAGE>
CONTRIBUTIONS
Eligibility to Make Contributions
Traditional IRA Contributions
You are eligible to make a regular Traditional IRA contribution for any tax
year in which you have earned income. However, you cannot make a Traditional IRA
contribution for the calendar year you reach age 701/2 or for any later year.
You must make your regular Traditional IRA contributions for any tax year
during that tax year or by April 15th of the next year. You may make rollover
contributions or transfers to your Traditional IRA at any time even if you have
reached the age of 701/2 (see "Rollovers, Transfers and Conversions" below).
If you are an employee, "earned income" means the amount shown as wages on
the Form W-2 that you receive from your employer. If you are self-employed, your
"earned income" is your net profits, if any, as shown on the "Net profits or
loss" line on the Schedule C or C-EZ of your IRS Form 1040 less your
self-employment tax deduction and contributions to a qualified retirement plan
on your own behalf. If you are performing income-producing services as a partner
in a partnership, your "earned income" is your share of the net partnership
profits as shown on the Schedule K-1 of your partnership return (IRS Form 1065)
less your self-employment tax deduction and contributions to a qualified
retirement plan on your own behalf. In most cases, earned income will not
include passive income, such as investment income or rental income.
Roth IRA Contributions
You are eligible to make a regular Roth IRA contribution for any tax year
in which you have earned income (described above), and if your Adjusted Gross
Income (AGI) does not exceed the applicable tax year's maximum allowable AGI.
Your AGI for this purpose is, in general, your income from all sources before
any deductions. The instructions to your federal income tax return (i.e., Form
1040) will provide you with specific guidance on calculating your AGI for this
purpose.
For 1998, if you are single and your AGI is below $95,050, you may make a
full $2,000 (or 100% of your earned income, if less) Roth IRA contribution. If
your AGI is $110,000 or more, you cannot make any Roth IRA contribution. If your
AGI is more than $95,050 and less than $110,000, and you have earned income of
at least the amount of your Roth IRA contribution, your maximum Roth IRA
contribution will be an amount between $200 and $1,990. If your AGI falls in
this zone, you can calculate your maximum Roth IRA contribution with this
formula:
Maximum Maximum
$15,000 - (AGI - $95,000) X Allowable = Roth IRA
- ------------------------- Contribution Contribution
$15,000
(Your "Maximum Allowable Contribution" is the lesser of $2,000 or 100% of
your earned income.)
<PAGE>
You must round up your result to the next highest $10 level (the next
highest number which ends in zero). For example, if your result was $1,521, you
would round it up to $1,530. In addition, if your rounded result is greater than
$0, but less than $200, your maximum Roth IRA contribution would automatically
be $200.*
For 1998, if you are married and file a joint return and you and your
spouse's combined AGI is below $150,050, you may make a full $2,000 Roth IRA
contribution (or 100% of your combined earned income, if less). If your combined
AGI is $160,000 or more, you cannot make any Roth IRA contribution. If your
combined AGI is more than $150,050 and less than $160,000, and you have earned
income of at least the amount of your Roth IRA contribution, your maximum Roth
IRA contribution will be an amount between $200 and $1,990. If your combined AGI
falls in this zone, you can calculate your maximum Roth IRA contribution with
this formula:
$10,000 - Maximum Maximum
(combined AGI - $150,000) X Allowable = Roth IRA
- -------------------------- Contribution Contribution
$10,000
(Your "Maximum Allowable Contribution" is the lesser of $2,000 or 100% of
your earned income.)
You must round up your result to the next highest $10 level (the next
highest number which ends in zero). For example, if your result was $1,521, you
would round it up to $1,530. In addition, if your rounded result is greater than
$0, but less than $200, your maximum Roth IRA contribution would automatically
be $200.*
* This assumes that you have at least $200 in earned income. If you have
less, the maximum would be equal to the amount of the earned income.
Maximum Combined Traditional and Roth IRA Contributions
Your maximum combined regular Traditional and Roth IRA contributions for
each tax year is the lesser of $2,000 or 100% of your earned income. However, if
your earned income is less than your spouse's earned income and you and your
spouse file a joint federal income tax return for the year, you may contribute
up to the lesser of (a) $2,000 or (b) your combined earned income reduced by the
amount your spouse contributes to his or her IRA for the year. Thus, married
persons may often make total IRA contributions of up to $4,000, even if one
spouse does not work. You can split the contribution amount in any manner among
IRAs for you and your spouse as long as you do not contribute more than $2,000
to all IRAs belonging to one spouse. (Your ability to make a Roth IRA
contribution is subject to your AGI, as described above in this section. Also,
under certain circumstances to gain the maximum possible federal income tax
deduction for Traditional IRA contributions, you may be required to carefully
allocate your contributions among IRAs. See "Deductibility of Your Traditional
IRA Contributions" below.)
<PAGE>
Excess IRA Contributions
If you make contributions to one or more IRAs which exceed the amount you
are allowed to contribute for any tax year, the excess over the allowable amount
will be subject to a 6% IRS excess contribution tax unless you remove it (and
any attributable earnings) by the due date, including any extensions, for your
federal income tax return for the year for which you made the contributions.
If you make a contribution to a Roth IRA or a conversion of a Traditional
IRA (see "Conversion from a Traditional IRA to a Conversion Roth IRA" below) and
later determine that you do not qualify to make such contribution or conversion,
legislation is currently pending which may allow you to transfer the excess
amount (and earnings) to a Traditional IRA by the due date of your tax return
for the year of the contribution or conversion. This transfer will be included
as a part of your Maximum Allowable Contribution (see "Eligibility to Make
Contributions" above) for the year. If this legislation is not enacted, the 6%
penalty described above may apply for contributions or conversions which you are
not qualified to make.
Deductibility of Your Traditional IRA Contributions
Active Participant Status
If either you or your spouse is an "active participant" in an
employer-maintained retirement plan, your Traditional IRA contributions may be
fully or partially deductible or may be nondeductible. You are an "active
participant" if you make contributions to, or receive credit for an employer
contribution in, certain employer-maintained retirement plans. These plans
include pension plans, profit-sharing plans, 401(k) plans, 403(b) plans
(tax-sheltered annuities), Keogh plans, ESOPs (stock bonus plans), simplified
employee pension plans (SEP-IRAs), simple retirement accounts (simple IRAs) and
certain governmental plans.
You will be considered to be an active participant for the year even if you
are not yet vested in any contributions made on your behalf to an
employer-maintained retirement plan. Also, if you make required contributions or
voluntary employee contributions to an employer-maintained retirement plan, you
will be considered to be an active participant even if you only worked for the
employer for part of the year.
You will not be considered to be an active participant if you are covered
in a plan only because of your service as (1) an Armed Force Reservist, for less
than 90 days active service, or (2) a volunteer firefighter covered for
firefighting service by a governmental plan.
If you are an employee, the Form W-2 that you receive from your employer
should indicate whether you were an active participant for the year that the
Form W-2 covers. If you have any questions about your participation in your
employer's plan, you should check with your employer.
(NOTE: If a husband and wife live apart for an entire tax year, and file
separate federal income tax returns, they will not be treated as married for the
purposes of these IRA deduction limits.)
<PAGE>
Deductibility if Neither You nor Your Spouse Is an Active Participant
If neither you nor your spouse is an active participant in an
employer-maintained retirement plan, you can deduct 100% of your Traditional IRA
contributions up to the maximum amount: in general, the lesser of $2,000 or 100%
of earned income. (See "Eligibility to Make Contributions" above.)
Deductibility if You or Your Spouse Is an Active Participant
If you are an active participant in an employer-maintained retirement plan,
the amount of your Traditional IRA contributions that you can deduct will depend
on what your modified adjusted gross income ("AGI") is for the year for which
you want to make an IRA contribution. Your AGI for this purpose is, in general,
your income from all sources before any deductions. The instructions to your
federal income tax return (i.e., Form 1040) will provide you with specific
guidance on calculating your AGI for this purpose.
Remember, even if you can deduct only a portion of your maximum allowable
Traditional IRA contribution, you can still contribute the difference between
the maximum deductible portion of your contribution and your maximum IRA
contribution (see "Eligibility to Make Contributions" above) as a nondeductible
contribution to a Traditional IRA or a Roth IRA (if you meet the Roth IRA income
qualifications, as described above in "Eligibility to Make Contributions"). You
may also choose to treat as nondeductible a contribution which could be
deductible. Any contributions you make to an IRA, whether deductible or
nondeductible, will accumulate earnings tax deferred until you withdraw the
contributions at a later date. (Withdrawals of Roth IRA earnings may be
tax-free, as described below in "Taxability of IRA Distributions.")
Single Individuals
If you are single and your AGI is below $30,050, you can deduct 100% of
your Traditional IRA contribution up to your maximum allowable contribution (see
"Eligibility to Make Contributions" above). If your AGI is $40,000 or more, you
cannot deduct any of your Traditional IRA contribution. If your AGI is more than
$30,050 and less than $40,000, and you have earned income of at least the amount
of your Traditional IRA contribution, your maximum tax-deductible Traditional
IRA contribution will be an amount between $200 and $1,990. If your AGI falls in
this zone, you can calculate the maximum deductible portion of your Traditional
IRA contribution with this formula:
Maximum
$10,000 - Maximum Deductible
(combined AGI - $30,000) X Allowable = Portion of
- --------------------------- Contribution Traditional IRA
$10,000 Contribution
<PAGE>
(Your "Maximum Allowable Contribution" is the
lesser of $2,000 or 100% of your earned income.)
You must round up your result to the next highest $10 level (the next
highest number which ends in zero). For example, if your result was $1,521, you
would round it up to $1,530. In addition, if your rounded result is greater than
$0, but less than $200, the maximum deductible portion of your Traditional IRA
contribution would automatically be $200.*
Married Individuals
If you are married and file a joint return and you and your spouse's
combined AGI is below $50,050, you can deduct 100% of your Traditional IRA
contribution up to your Maximum Allowable Contribution (see "Eligibility to Make
Contributions" above). If your combined AGI is $60,000 or more, you cannot
deduct any of your Traditional IRA contribution. If your combined AGI is more
than $50,050 and less than $60,000, and you have earned income of at least the
amount of your IRA contribution, your maximum tax-deductible IRA contribution
will be an amount between $200 and $1,990. If your combined AGI falls in this
zone, you can calculate the maximum deductible portion of your Traditional IRA
contribution with this formula:
Maximum
$10,000 - Maximum Deductible
(combined AGI - $150,000) X Allowable = Portion of
- -------------------------- Contribution Traditional IRA
$10,000 Contribution
(Your "Maximum Allowable Contribution" is the lesser of $2,000 or 100% of
your earned income.)
You must round up your result to the next highest $10 level (the next
highest number which ends in zero). For example, if your result was $1,521, you
would round it up to $1,530. In addition, if your rounded result is greater than
$0, but less than $200, the maximum deductible portion of your Traditional IRA
contribution would automatically be $200.*
* This assumes that you have at least $200 in earned income. If you have
less, the deductible portion would be equal to the amount of the earned
income.
Deductibility if Your Spouse Is an Active Participant, and You Are Not
If you are married and file a joint return and your spouse is an active
participant in an employer-maintained retirement plan, but you are not, then you
can deduct 100% of your Traditional IRA contribution up to your Maximum
Allowable Contribution (see "Eligibility to Make Contributions" above) if your
combined AGI is below $150,050. If your combined AGI is $160,000 or more, you
cannot deduct any of your Traditional IRA contribution. If your combined AGI is
more than $150,050 and less than $160,000, and you and your spouse have earned
income of at least the amount of your IRA contribution, your maximum
tax-deductible Traditional IRA contribution will be
<PAGE>
an amount between $200 and $1,990. If your combined AGI falls in this zone, you
can calculate the maximum deductible portion of your Traditional IRA
contribution with this formula:
Maximum
$10,000 Maximum Deductible
(combined AGI - $150,000) X Allowable = Portion of
- ---------------------------- Contribution Traditional IRA
$10,000 Contribution
(Your "Maximum Allowable Contribution" is the lesser of $2,000 or 100% of
your earned income.)
You must round up your result to the next highest $10 level (the next
highest number which ends in zero). For example, if your result was $1,521, you
would round up to $1,530. In addition, if your rounded result is greater than
$0, but less than $200, the maximum deductible portion of your Traditional IRA
contribution would automatically be $200.*
* This assumes that you and your spouse have at least $200 in earned income.
If you and your spouse have less, the deductible portion would be equal to
the amount of earned income.
Nondeductibility of your Roth IRA Contributions
Contributions to a Roth IRA are not deductible, regardless of your earned
income.
Other Eligibility, Contribution and Deductibility Provisions
Reporting of Nondeductible Contributions to IRAs
If you make a nondeductible contribution to a Traditional IRA, you must
report the amount of the nondeductible contribution to the IRS on Form 8606 as a
part of your annual federal income tax return. It has not yet been established
whether your nondeductible Roth IRA contributions must be reported on Form 8606.
You may make contributions to your Traditional IRA at any time during the
year until the total of your contributions to your Traditional IRA equals your
maximum (see "Eligibility to Make Contributions" above), without having to know
how much will be a Traditional IRA deductible contribution. When you fill out
your tax return, you may then figure out how much of your Traditional IRA
contribution is deductible. You should be aware that there is a $100 IRS penalty
tax for overstating on your federal income tax return the amount you can deduct.
Form of Contribution
Unless you are making a rollover contribution, your contribution must be
made in cash. Rollover contributions may be made in a form other than cash if
permitted by Scudder Investor Services, Inc. You cannot make any contributions
to this IRA for investment in life insurance contracts.
All contributions you make to this IRA are nonforfeitable (100% vested).
<PAGE>
SEP Contributions
If your employer makes contributions to your Traditional IRA as part of a
Simplified Employee Pension Plan (SEP-IRA), those employer contributions are not
subject to the eligibility and deduction limits discussed above. Your employer
may contribute up to the lesser of $24,000 (for 1997 and 1998) or 15% of your
compensation to your IRA and deduct that amount on the employer's federal income
tax return. The employer contribution amount is excluded from your income for
federal income tax purposes. You may also make your own contributions, subject
to the eligibility and deduction limits above, to the same Traditional IRA to
which your employer makes contributions.
ROLLOVERS, TRANSFERS, and CONVERSIONS
Rollovers and Transfers to Traditional IRAs
You are allowed to transfer or roll over all or a part of your Traditional
IRA investment to another Traditional IRA without any tax liability. However,
you are only allowed to make one rollover from a particular Traditional IRA
during any 12-month period. In addition, if you are to receive a distribution of
all or any part of your interest in an employer-maintained retirement plan, then
you may roll over all or a portion of the distribution into a Traditional IRA
either directly from the employer-maintained plan or within 60 days of the day
you receive it, unless the distribution is a required minimum distribution or
part of a series of substantially equal payments made over a period of 10 years
or more or over your life expectancy or the joint life expectancy of you and
your beneficiary. Please note that distributions paid to you directly will be
subject to a 20% withholding requirement unless they are required minimum
distributions, or payments made over a period longer than 10 years of your life
expectancy or the joint life expectancy of you and your beneficiary.
Distributions directly rolled over to a Traditional IRA are not subject to 20%
withholding.
Rollovers and Transfers to Roth IRAs
You are allowed to transfer or roll over all or part of your Roth IRA
investment to another Roth IRA without any tax liability. However, you are only
allowed to make one rollover from a particular Roth IRA during any 12-month
rollover period. In addition, if you are to receive a distribution of all or any
part of your interest in an employer-maintained retirement plan, you may not
directly roll over such amount to a Roth IRA. You must roll it over into a
Traditional IRA first, and you may then be able to convert all or part of your
Traditional IRA to a Conversion Roth IRA, depending on your AGI, or you and your
spouse's combined AGI (see "Conversion from a Traditional IRA to a Conversion
Roth IRA" below).
Conversion from a Traditional IRA to a Conversion Roth IRA
If you are single and your AGI does not exceed $100,000, or if you are
married and you and your spouse's combined AGI does not exceed $100,000 (and you
are not married filing a separate return), you may convert all or part of your
Traditional IRA to a Conversion Roth IRA. (Note, a conversion from a Traditional
IRA to a Conversion Roth IRA must be made as a rollover and not a transfer.) If
you are married and file a separate return, you may not make a conversion.The
entire amount of the taxable portion of the conversion (i.e., all amounts other
than nondeductible contributions) is taxable to you for the tax year during
which the conversion is made. However, if you make the conversion before January
1, 1999, the tax will be spread over four years. If you die during the four year
period, it has not been determined whether any remaining taxable amounts must be
included on your final tax return, or if you are married and your spouse is your
beneficiary, if your spouse can continue to include the appropriate amounts in
his or her income for the remainder of the four year period.
TAXABILITY OF IRA DISTRIBUTIONS
Traditional IRAs
If you have made only deductible contributions to your Traditional IRA, all of
your distributions will be taxed as ordinary income for the year you receive the
distributions. If, however, you made any nondeductible contributions, the
portion of the IRA distributions consisting of nondeductible contributions will
not be taxed again when you receive it. If you made any nondeductible
Traditional IRA contributions, each distribution from your Traditional IRA (or
IRAs) will consist of a nontaxable portion (return of nondeductible
contributions) and a taxable portion (return of deductible contributions, if
any, and account earnings). You may use the following formula to determine the
nontaxable portion of your distributions for a tax year:
Nondeductible
Contributions Total Non-taxable
Not Yet Distributed x Distribution = Distribution
------------------- (for the year) (for the year)
Year-End Total Traditional
IRA Account Balances Plus
Distributions Taken During
Year (Currently, there is
no clarification as to whether
you must also include your Roth
and Conversion Roth IRA
account balances in this amount.)
To figure the year-end total Traditional IRA account balances, you treat
all of your Traditional IRAs as a single IRA. This includes all regular
Traditional IRAs, as well as SEP-IRAs, and Traditional IRAs to which you have
made rollover contributions.
If you take a distribution from a Traditional IRA to which you have made
nondeductible contributions, you must file Form 8606 as part of your annual
federal income tax return for the year of the distribution.
Roth IRAs
Distributions of earnings from your Roth IRA (or Conversion Roth IRA) will
be taxed as ordinary income for the year you receive the distribution, unless 1)
the distribution is made after five taxable years from your first Roth IRA
contribution (or after five taxable years from each conversion of a Traditional
IRA to a Conversion Roth IRA) and if 2) the distribution is made for one of the
following reasons:
1) It is paid to you after you attain age 59 1/2.
2) It is paid to you because you are disabled.
3) It is paid to your beneficiary or estate because of your death.
4) It is paid for the first-time home purchase for you, your spouse, or any
child, grandchild or ancestor of you or your spouse. (Please see your tax
advisor to determine if your distribution qualifies as made for the
first-time purchase of a home.) A maximum lifetime amount of $10,000 from
all IRAs can qualify for this tax exception.
The five-taxable-year period indicated above begins on the January 1
of the calendar year during which you make a contribution or conversion.
Distributions from a Roth IRA are made first from non-taxable principal and
then from earnings. Roth IRAs to which you make regular contributions are
aggregated for purposes of determining non-taxable principal and earnings for
distributions from Roth IRAs. Conversion Roth IRAs with the same five year
holding period are aggregated for purposes of determining non-taxable principal
and earnings for distributions from Conversion Roth IRAs. The five year holding
period for a Conversion Roth IRA begins with the tax year of the most recent
conversion to the Conversion Roth IRA. Because of this rule, you may wish to
establish a separate Conversion Roth IRA account for each conversion you make.
Special rules may apply if a distribution is made from a Conversion Roth
IRA within the five-taxable-year period beginning with the January 1 of the year
in which the most recent conversion was made to that particular Conversion Roth
IRA. In this case, certain penalties may apply on the amounts which were
previously subject to tax at the time of the conversion (see "Special Penalty
for Certain Conversion Roth IRA Distributions" below).
It is currently not yet established whether you must file Form 8606 as part
of your annual federal income tax return for the year of the distribution of
Roth IRA contributions and/or earnings.
<PAGE>
PENALTIES ON IRA DISTRIBUTIONS
Traditional IRAs
Since the purpose of your IRA is to accumulate funds for your retirement, if you
take a distribution from your Traditional IRA before you reach the age of 591/2,
the taxable portion of the distribution will be subject to a 10% IRS early
withdrawal penalty tax unless the distribution meets one of these exceptions:
1) It is made to your beneficiary or your estate because of your death.
2) It is part of a series of installment payments paid over your life
expectancy or the joint life and last survivor expectancy of you and your
beneficiary, and the payments continue until the later of five years or
your reaching age 59 1/2.
3) It is rolled over into another IRA or a qualified plan (if allowed) within
60 days of the day you receive the distribution.
4) It is paid to you because you are disabled.
5) It is paid to you to pay medical expenses in excess of 7 1/2% of your
adjusted gross income.
6) It is paid to you to pay for medical insurance premiums if you are
unemployed (or within 60 days after your re-employment) and you have
received unemployment compensation for at least 12 consecutive weeks during
the current or preceding taxable year. (Self-employed individuals may only
be eligible for this exception in certain circumstances.)
7) It is paid to you, your spouse, or any child or grandchild of you or your
spouse for qualified higher education expenses. (Please see your tax
advisor to determine if your distribution qualifies as made for qualified
higher education expenses.)
8) It is paid for the first-time purchase of a home for you, your spouse, or
any child, grandchild or ancestor of you or your spouse. (See your tax
advisor to determine if your distribution qualifies as made for the
first-time purchase of a home.) A maximum lifetime amount of $10,000 from
all IRAs can qualify for this penalty exception.
Roth IRAs
The taxable portion (the earnings portion) of distributions from Roth IRAs
or Conversion Roth IRAs will be subject to a 10% penalty tax, unless one of the
exceptions listed in items 1-8 above applies. (A special penalty may apply for
distribution from a Conversion Roth IRA within five taxable years of a
conversion. See "Special Penalty for Certain Conversion Roth IRA Distributions"
below).
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SPECIAL PENALTY
FOR CERTAIN CONVERSION
ROTH IRA DISTRIBUTIONS
Legislation is currently pending which will provide that amounts which are
distributed from a Conversion Roth IRA within five taxable years of a conversion
would be subject to i) a 10% penalty and ii) for conversions made in 1998, an
additional 10% penalty. These penalties would be based on the amount that was
taxable at the time of conversion. Any such withdrawal from a Conversion Roth
IRA may also be deemed to come first from amounts which were taxable at the time
of the conversion.
In addition, separate Roth IRAs and Conversion Roth IRAs must be
maintained. The proposed legislation would provide that the five year holding
period described above may be deemed to begin with the most recent taxable year
for which a conversion is made. All Roth IRAs with the same five year holding
period would be aggregated to determine the amount of the withdrawal which is
considered attributable to the taxable amounts at the time of the conversion.
You must establish a separate Conversion Roth IRA for conversions of Traditional
IRAs that you make in different calendar years. One Conversion Roth IRA can be
established for all conversions made within the same calendar year.
REQUIRED DISTRIBUTIONS
Traditional IRAs
You must begin taking distributions from your Traditional IRA by the April
1 following the year in which you reach age 701/2. The minimum amount that you
are required to take for the year you reach 701/2 and each following year is the
amount that you would take as a distribution if you were taking distributions
over the joint life and last survivor expectancy of you and your beneficiary.
For more information on the minimum distribution requirements of your IRA, see
Articles IV and VIII of the Form 5305-A (1-98) Individual Retirement Custodial
Account Agreement.
Roth IRAs
You are not required to begin taking distributions from a Roth IRA (or
Conversion Roth IRA) at any time. If you die prior to a distribution of all
amounts held in a Roth IRA (or Conversion Roth IRA), certain distribution rules
apply to your beneficiary. For more information on the distribution requirements
of your Roth IRA (or Conversion Roth IRA) after your death, see Articles V and
IX of the Form 5303-RA(1-98) Individual Retirement Custodial Account Agreement.
EXCESS ACCUMULATION
PENALTY TAX
If you do not meet the minimum distribution requirements as discussed in
Articles IV and VIII of the Form 5305-A (1-98) Individual Retirement Custodial
<PAGE>
Account Agreement for any year, you will be subject to an IRS penalty tax of 50%
of the amount that you were required to take as a distribution but did not take
as a distribution.
ESTATE TAX
After your death, the balance in your IRA may be subject to an estate tax.
You should contact your attorney or accountant for more details.
PROHIBITED TRANSACTIONS
If you or your Beneficiary engage in any prohibited transactions, including
selling, exchanging, or leasing any property between you and the custodial
account, the account would lose its tax-exempt status and all assets of the
account will be treated as if they were distributed to you. You would then be
required to pay taxes on the appropriate portion of your IRA assets. (See
"Taxability of IRA Distributions" above.) In addition, if you are under age 59
1/2 and are not disabled, the distribution will also be subject to the 10% IRS
early withdrawal penalty tax unless it meets any of the exceptions listed above
under "Penalties on IRA Distributions" and is not subject to the penalty
described in "Special Penalty for Certain Conversion Roth IRA Distributions"
described above.
You also cannot use your IRA assets as collateral for a loan. If you do
this, the amount used as collateral will be treated as if it were distributed to
you and will be subject to tax and penalty tax as provided in the paragraph
above for prohibited transactions.
SCUDDER MUTUAL FUND
INFORMATION
Information about the Scudder mutual funds available for investment in this
IRA is available from Scudder Investor Services, Inc. You are required to
receive this information (given in the form of a prospectus governed by the
rules of the Securities and Exchange Commission) before you invest in the Funds.
Growth in the value of your custodial account cannot be guaranteed or
projected. The Funds' prospectuses and reports provide information regarding
current income and expenses.
BROKERAGE INFORMATION
Information about the brokerage services available for this IRA is available
from Scudder Brokerage Services, Inc. Growth in the value of your custodial
account cannot be guaranteed or projected.
CUSTODIAL PROVISIONS
These provisions supplement paragraphs 5-7 of Article IX of the Form 5305-RA
(1-98), Individual Retirement Custodial Account Agreement and paragraphs 5-7 of
Article VIII of the Form 5305-A (1-98), Individual Retirement Custodial Account
Agreement and should be read in conjunction with them.
<PAGE>
1. Your contributions must be made to a trust or custodial account for which
the trustee or custodian is either a bank or a person who has been approved
by the Secretary of the Treasury.
2. The Custodian may charge your custodial account for any fees or other
expenses of maintaining your account. The Custodian's fee schedule is also
referred to in Article IX of the Form 5305-RA (1-98), IRA Custodial Account
Agreement and Article VIII of the Form 5305-A (1-98) IRA Custodial Account
Agreement and notice of such fee schedule will be provided to you in an
appropriate manner.
REPORTING EXCESS
CONTRIBUTIONS,
EXCESS ACCUMULATIONS,
and EARLY WITHDRAWALS
TO THE IRS
For any year for which you have an excess contribution, an excess
accumulation, or an early withdrawal (unless the 1099-R you receive correctly
reflects that the distributions meet an exception to the penalty tax), you are
required to report it on Form 5329 with your annual federal income tax return to
the Internal Revenue Service.
The form of this Individual Retirement Account Plan has been approved by
the Internal Revenue Service. The approval, however, is only for the form of the
Plan and does not represent an approval of the merits of the Plan.
For Traditional IRAs:
IRA Form 5305-A (1-98)
SCUDDER INDIVIDUAL RETIREMENT CUSTODIAL
ACCOUNT AGREEMENT
(Under Section 408(a) of the Internal Revenue Code)
The Depositor whose name appears on the Scudder IRA Application is
establishing an individual retirement account under section 408(a) to provide
for his or her retirement and for the support of his or her beneficiaries after
death.
The Custodian named on the Application has given the Depositor the
disclosure statement required under Regulations section 1.408-6.
The Depositor has deposited with the Custodian the amount indicated on the
Application in cash. The Depositor and the Custodian make the following
agreement:
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
<PAGE>
contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or an
employer contribution to a simplified employee pension plan as described in
section 408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance
contracts, nor may the assets of the custodial account be commingled with other
property except in a common trust fund or common investment fund (within the
meaning of section 408(a)(5).
2. No part of the custodial funds may be invested in collectables (within
the meaning of section 408(m)), except as otherwise permitted by section
408(m)(3), which provides an exception for certain gold, silver, and platinum
coins issued under the laws of any state, and certain bullion.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin
to the Depositor under paragraph 3, or to the surviving spouse under paragraph
4, other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and to the surviving spouse and shall apply to all subsequent years. The life
expectancy of a non-spouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or
begin to be, distributed by the Depositor's required beginning date April 1
following the calendar year end in which the Depositor reaches age 70 1/2. By
that date, the Depositor may elect, in a manner acceptable to the Custodian, to
have the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last
survivor lives of the Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period
that may not be longer than the Depositor's life expectancy.
<PAGE>
(e) Equal or substantially equal annual payments over a specified period
that may not be longer than the joint life and last survivor
expectancy of the Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed
to him or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest
has begun, distribution must continue to be made in accordance with
paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has
begun, the entire remaining interest will at the election of the
Depositor or, if the Depositor has not so elected, at the election of
the beneficiary or beneficiaries, either
(i) Be distributed by the December 31 of the year containing the
fifth anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the
life or life expectancy of the designated beneficiary or
beneficiaries starting by December 31 of the year following the
year of the Depositor's death. If, however, the beneficiary is
the Depositor's surviving spouse, then this distribution is not
required to begin before December 31 of the year in which the
Depositor would have reached age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has
irrevocably commenced, distributions are treated as having begun on
the Depositor's required beginning date, even though payments may
actually have been made before that date.
(d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse,
no additional cash contributions or rollover contributions may be
accepted in the account.
5. In the case of distribution over life expectancy in equal or
substantially equal annual payments, to determine the minimum annual payment for
each year, divide the Depositor's entire interest in the Custodial account as of
the close of business on December 31 of the preceding year by the life
expectancy of the Depositor (or the joint life and last survivor expectancy of
the Depositor and the Depositor's designated beneficiary, or the life expectancy
of the designated beneficiary, whichever applies). In the case of distributions
under paragraph 3, determine the initial life expectancy (or joint life and last
survivor expectancy) using the attained ages of the Depositor and designated
beneficiary as of their birthdays in the year the Depositor reaches age 70 1/2.
In the case of distribution in accordance with paragraph 4(b)(ii), determine
life expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"Alternative Method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary
for the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service
and the Depositor prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear on the Application.
ARTICLE VIII
1. Please refer to the Scudder IRA Application or Scudder Brokerage IRA
Application which is incorporated into this Agreement as this paragraph of
Article VIII.
2. Depositor's Selection of Investments.
Investment Options
The Depositor may only direct the Custodian to invest custodial funds in
investment shares of the Mutual Funds (regulated investment companies for which
Scudder, Stevens & Clark, Inc., its successor or any affiliates, acts as the
investment adviser and which Scudder Investor Services, Inc., (the
"Distributor") has designated as appropriate for investments in the custodial
account), or in other investments which the Distributor or its successors has
designated as eligible investments for the custodial account.
Investments
As soon as practicable after the Custodian receives the Application, the
Custodian will invest the initial contribution or transfer as the Depositor
directed on the Application in shares of the Mutual Fund(s) or other investments
designated by the Distributor as eligible investments for the custodial account.
With regard to the Mutual Funds listed on the Application and any other Mutual
<PAGE>
Fund, the Depositor understands that neither the Custodian nor the Distributor
endorses the Mutual Funds as suitable investments for the custodial account. In
addition, neither the Custodian nor the Distributor will provide investment
advice to the Depositor. The Depositor assumes all responsibility for the choice
of his or her investments in the custodial account.
The Custodian will invest each subsequent contribution or transfer to the
custodial account as soon as practicable after the Custodian receives the
contribution or transfer, according to the Depositor's instructions for that
subsequent contribution or transfer, in the Mutual Funds or other investment
designated by the Distributor as eligible investments for the custodial account.
If the Depositor's custodial account assets are invested in any Mutual Fund
which terminates or is eliminated, the Custodian will transfer the custodial
account assets in that Mutual Fund to another Mutual Fund designated by the
Distributor unless the Depositor instructs the Custodian otherwise in the manner
required by the Custodian.
If the Custodian receives any investment instructions from the Depositor
which in the opinion of the Custodian are not in good order or are unclear, or
if the Custodian receives any monies from the Depositor which would exceed the
amount that the Depositor may contribute to the custodial account, the Custodian
may hold all or a portion of the monies uninvested pending receipt of written
(or in any other manner permitted by the Distributor) instructions or
clarification. During any such delay the Custodian will not be liable for any
loss of income or appreciation, loss of interest, or for any other loss. The
Custodian may also return all or a portion of the monies to the Depositor.
Again, in such situations, the Custodian will not be liable for any loss.
Unless the Custodian permits otherwise, all dividend and capital gains
distributions received on shares of a Mutual Fund in the custodial account
(unless made in the form of additional shares) will be reinvested in shares of
the same Mutual Fund which paid the distribution, and credited to the custodial
account. All accumulations from other investments will be reinvested in the
Depositor's custodial account according to the Depositor's instructions to the
Custodian which must be in a form acceptable to the Custodian.
The Depositor may change any portion of his or her investment in an
eligible investment to another eligible investment by requesting the change in
the manner the Custodian requires. However, the Distributor reserves the right
to refuse to sell shares of any Mutual Fund when it determines in its own
judgment that the Depositor has made frequent trading in the custodial account.
3. Contributions
All contributions by the Depositor to the custodial account must be in
cash, except for initial contributions of rollovers which may be made in a form
other than cash if permitted by the Distributor.
<PAGE>
The Custodian will designate contributions (other than rollover
contributions) as being made for particular years as requested by the Depositor.
If the Depositor does not designate a year for any contribution, the Custodian
will designate the contribution as being made for a particular year according to
a policy established by the Distributor.
If permitted by the Distributor, the Depositor may make rollover
contributions to the custodial account of deductible employee contributions
which were made to qualified employer or government retirement plans as provided
in Internal Revenue Code Section 72(o).
The Depositor warrants that all contributions to the custodial account,
including any rollover contributions, will be made in accordance with the
provisions of the Internal Revenue Code.
Excess Contributions
If the Depositor exceeds the amount that may be contributed to his or her
custodial account for any year, the Custodian will, upon a proper written
request from the Depositor, either 1) return the excess and any attributable
earnings to the Depositor, or 2) treat the contribution as if it were made for a
later year.
4. Transfers
The Custodian will accept transfers of a cash amount to the custodial
account from another custodian or a trustee of an individual retirement account
or individual retirement annuity upon the Depositor's written direction. The
Custodian will also transfer a cash amount in the custodial account upon the
written request of the Depositor to another custodian or trustee of an
individual retirement account or individual retirement annuity. For such a
transfer, the Custodian may require the written acceptance of the successor
custodian. The Depositor warrants that all transfers to and from the custodial
account will be made in accordance with the rules and regulations issued by the
Internal Revenue Service.
5. Custodian's Fees
The Custodian is entitled to receive reasonable fees for establishing and
maintaining the custodial account. These fees will be set by the Custodian from
time to time.
The Custodian may change its fee schedule upon thirty (30) days' written
notice to the Distributor.
The Custodian has the right to charge the custodial account, including the
right to liquidate Mutual Fund shares or other investments, or to charge the
Depositor for the Custodian's fees, as well as for any income, gift, estate and
inheritances taxes (including any transfer taxes incurred in connection with the
investment or reinvestment of the assets of the custodial account), which are
levied or assessed against the custodial account assets, and for all other
administrative expenses of the Custodian for performing its duties, including
any fees for legal services provided to the Custodian.
<PAGE>
6. Custodial Account
Once the Custodian mails an acknowledgement of its receipt of the
Application to the Depositor, this Agreement will be effective as of the date
the Depositor signed the Application. As soon as practicable after the Custodian
receives the Application, the Custodian will open and maintain a separate
custodial account for the Depositor.
All Mutual Fund shares or other investments in the custodial account will
be registered in the name of the Custodian (with or without identifying the
Depositor) or in the name of the Custodian's nominee. The Custodian will
deliver, or cause to be executed and delivered, to the Depositor all notices,
prospectuses, financial statements, proxies and proxy solicitating materials
relating to the Mutual Funds or other investments in the custodial account.
The Custodian will vote shares only according to the Depositor's
instructions on an executed proxy; provided that the Custodian may without
written direction from the Depositor vote shares "present" solely for the
purposes of establishing a quorum.
7. Additional Provisions Regarding the Custodian
According to this Agreement, the Custodian will be an agent for the
Depositor for the custodial account to receive and to invest contributions, and
to hold and to distribute these investments as authorized by the Depositor, and
to keep adequate records and provide reports as required by the Agreement. None
of the parties to this Agreement intend to confer any fiduciary duties on the
Custodian, and no such duties shall be implied.
The Custodian may perform any of its administrative duties through other
persons designated by the Custodian from time to time. However, the custodial
account must be registered in the name of the Custodian or its nominee as
provided in paragraph 6 above.
The Custodian assumes no responsibility or liability for collecting
contributions, for the deductibility or propriety of any contribution made to
the custodial account, or for the purpose or propriety of any distributions made
from the custodial account. Those matters are the sole responsibility of the
Depositor.
The Custodian will keep adequate records of transactions it is required to
perform for the custodial account. The Custodian will provide to the Depositor a
written report or reports reflecting the transactions in the custodial account
over each calendar year and the assets in the custodial account as of the end of
the calendar year.
If the Custodian resigns or is removed, as provided in paragraph 10 below,
the Custodian must provide a written report or reports reflecting the
transactions in the custodial account from the last report through the date of
the Custodian's resignation or removal, and the assets in the custodial account
as of the date of the Custodian's resignation or removal.
After providing the end-of-the-year report or the reports from the
Custodian's resignation or removal, the Custodian will be forever released from
all liability and accountability to anyone for its acts or transactions
reflected in the report(s), except those acts or transactions to which the
Depositor (or recipient, if different) has filed a written objection with the
Custodian within 60 days of the date the report was provided to the Depositor or
other recipient.
The Depositor always fully indemnifies the Custodian and will hold it
harmless from any and all liability which may arise from this Agreement, except
that which arises from the Custodian's negligence or willful misconduct. The
Custodian will not be obligated or expected to commence or defend any legal
action or proceeding about this Agreement unless both the Custodian and
Depositor agree and the Custodian will be fully indemnified to its satisfaction.
The Custodian may conclusively rely upon and will be protected from acting
on any written order from or authorized by the Depositor, or any other notice,
request, consent, certificate or other instrument, paper, or other communication
which the Custodian believes to be genuine and issued in proper form with proper
authority, as long as the Custodian acts in good faith in taking or omitting to
take any action in reliance upon the communication.
Before the Beneficiary has notified the Custodian (in the manner required
by the Custodian) of the Depositor's death, the Custodian will not be
responsible for treating the Beneficiary as if he or she has rights and
obligations under this Agreement.
8. Distributions
This paragraph supplements the information found in Article IV above, and
must be read in conjunction with it.
The Depositor has the responsibility to ensure that he or she will begin to
receive distributions from the custodial account on or before the Required
Beginning Date (i.e., the April 1 following the year in which the Depositor
reaches age 70 1/2). The Depositor also has sole responsibility to initiate
distributions from the custodial account and sole responsibility to ensure that
all distributions are made in accordance with the applicable provisions of the
Internal Revenue Code.
Distribution Requests
The Depositor is responsible for making the distribution requests to the
Custodian sufficiently in advance of any requested or required distribution time
to ensure that the distribution will be made before that requested or required
distribution time.
The Custodian will make distributions from the custodial account only after
receiving a written request from the Depositor (or any other party entitled to
receive the assets of the custodial account) or any other party entitled to
receive the assets of the custodial account. The Custodian will make the
distribution as soon as practicable after it receives the written request.
The Depositor must make the distribution request in the form required by
the Custodian. The distribution
<PAGE>
request must include the form of distribution requested (e.g., lump-sum
distribution or installment payments). The Depositor must provide to the
Custodian any applications, certificates, tax waivers, signature guarantees, and
any other documents (including proof of legal representative's authority) that
the Custodian requires. The Custodian will not be liable for complying with a
distribution request that appears on its face to be genuine, nor will the
Custodian be liable for refusing to comply with a distribution request which the
Custodian is not satisfied is genuine.
If the distribution request is not made in the correct form, the Custodian
is not responsible and will not be liable to the Depositor for any losses while
the Custodian waits for the distribution request to be made in the proper form.
The Depositor also agrees to fully indemnify the Custodian for any losses which
may result from the Custodian's failing to act upon an improperly made
distribution request.
The Depositor may request a distribution of any portion of the custodial
account at any time. However, the Depositor must meet the minimum distribution
requirements of the Internal Revenue Code at all times.
The Custodian does not assume any responsibility for the tax treatment of
any distributions from the custodial account.
Notwithstanding anything to the contrary in 3.(b.) and (c.) of Article IV
above, the Depositor may not receive distributions from the custodial account in
the form of an annuity.
Designation of Beneficiary
The Depositor may designate a beneficiary or beneficiaries (the
"Beneficiary") to receive the assets of the custodial account upon the
Depositor's death. The Depositor must designate his or her Beneficiary to the
Custodian in the manner required by the Custodian.
If the Depositor's Beneficiary is not living at the Depositor's death, the
Depositor's estate is entitled to receive the assets of the custodial account.
In addition, to the extent the Depositor has not effectively disposed of the
assets in the custodial account by his or her designation of Beneficiary, the
Depositor's estate will be entitled to receive the assets of the custodial
account.
If the Depositor's Beneficiary dies after the Depositor, the Beneficiary's
estate will be entitled to receive the assets of the custodial account.
The Depositor may change his or her choice of a Beneficiary at any time by
notifying the Custodian in the manner required by the Custodian. However, if the
Depositor changes his or her Beneficiary after the Required Beginning Date, that
new Beneficiary may decrease the joint life and last survivor expectancy of the
Depositor and his or her Beneficiary for purposes of installment payments paid
over the joint life and last survivor expectancy of the Depositor and his or her
Beneficiary.
Before the Depositor's death, the Depositor's Beneficiary has no right or
power to anticipate any part of the custodial account, or to sell, assign,
<PAGE>
transfer, pledge, or hypothecate any part of the account. In addition, the
Custodial account will not be liable for any debts of the Depositor's
Beneficiary or, except as required by law, subject to attachment, execution, or
any other legal process.
Election to Have Life Expectancy Recalculated
For installment payments to be made over the Depositor's life expectancy,
the Depositor may make an election to have the Custodian annually recalculate
his or her life expectancy, and the life expectancy of the Depositor's spouse,
if applicable.
The Depositor must make the election to have the Custodian recalculate no
later than his or her Required Beginning Date. The Depositor must make this
election in the manner required by the Custodian.
If the depositor does not elect to have the Custodian recalculate life
expectancy, the Custodian will not recalculate the life expectancy.
9. Amendment
This paragraph supplements the information found in Article VII above, and
must be read in conjunction with it.
If the Distributor amends this Agreement, it must provide a written notice
of the amendment to both the Depositor and the Custodian. The Depositor will be
considered to have consented to the Distributor's amendment 30 days after the
Distributor has mailed the notice to the Depositor unless within that 30-day
period the Depositor gives the Custodian a proper written order for a lump-sum
distribution. The Custodian will be considered to have consented to the
Distributor's amendment unless it notifies the Distributor otherwise within 30
days after the Distributor has mailed (or otherwise delivered) the notice to the
Custodian.
The Custodian may change its fee schedule, as provided in paragraph 5
above, without having to amend this Agreement.
10. Resignation or Removal of Custodian
The Custodian may resign at any time by giving at least 30 days' written
notice to the Distributor. The Distributor may remove the Custodian at any time
by giving at least 30 days' written notice to the Custodian.
If the Custodian resigns or is removed, the Distributor must either appoint
a successor custodian to serve under this Agreement or notify the Depositor that
he or she must appoint a successor custodian. The successor custodian must
provide a written acceptance of its appointment as successor custodian to the
Custodian. Upon receiving this written acceptance, the Custodian must transfer
to the successor custodian all of the assets and records of the custodial
account.
The Custodian may reserve a portion of the custodial account assets to pay
for any fees, compensation, costs, expenses, or for any liabilities constituting
a charge on or against the Custodian. If any assets remain after paying these
<PAGE>
items, the Custodian will pay the remainder to the successor custodian.
If the Custodian resigns or is removed, and the Distributor or the
Depositor has not appointed a successor custodian within 30 days after the
Custodian's resignation or removal (or a longer period, if the Custodian
agrees), the Custodian will terminate this Agreement as provided in paragraph
11, below.
After the Custodian has transferred the custodial account assets to the
successor custodian, the Custodian is relieved of any further liability for this
Agreement, the custodial account, and the custodial account assets.
The Custodian or any successor custodian appointed to serve under this
Agreement, must be either 1) a bank as defined in Internal Revenue Code Section
408(n), or 2) such other person who qualifies to serve as prescribed by Internal
Revenue Code Section 408(a)(2) and satisfies the Distributor and the Custodian
that he or she qualifies.
11. Termination of Agreement
As provided in paragraph 10, above, the Custodian will terminate the
Agreement if the Distributor or the Depositor has not appointed a successor
custodian within the specified time after the Custodian resigns or is removed.
If this Agreement is terminated, the Custodian will distribute the custodial
account assets in kind or cash to the Depositor. The Custodian may reserve a
portion of the assets as provided in paragraph 10.
The Depositor may terminate this Agreement at any time by taking a lump-sum
distribution of his or her investment in the custodial account.
After this Agreement has been terminated, it will have no further force and
effect, and the Custodian is relieved of any further liability for this
Agreement, the custodial account, and the custodial account assets.
12. Liquidation of Custodial Account
The Distributor has the right to direct the Custodian by a written order to
liquidate the custodial account if the value of the account is below a minimum
level established from time to time by the Distributor on a nondiscriminatory
basis. Once the Custodian receives a written liquidation order from the
Distributor, the Custodian will liquidate the assets in the custodial account as
soon as practicable and distribute the proceeds to the Depositor in a lump sum
in cash or in kind. The Custodian may reserve a portion of the account to pay
for any fees, compensation, costs or expenses, or for any liabilities
constituting a charge on or against the Custodian. If any assets remain after
paying these items, the Custodian will pay the remainder to the Depositor.
If the custodial account is liquidated as provided above, neither the
Distributor nor the Custodian will be responsible or liable for any penalty or
loss incurred by anyone because of the liquidation. In addition, after the
account is liquidated, both the Distributor and the Custodian will be relieved
from any further liability for this Agreement, the custodial account, and the
custodial account assets.
13. Miscellaneous
Any reference in this Agreement to Internal Revenue Code means the Internal
Revenue Code of 1986, as amended, and any future successors.
Except as provided in the next sentence, any references to "Depositor" in
this Agreement will apply to the Depositor's Beneficiary if the Depositor is
deceased. The references to the "Depositor" in paragraphs 3, 4, and 8 of this
Article VIII will apply to the Depositor's Beneficiary only if the Depositor is
deceased, the Depositor's Beneficiary is the Depositor's surviving spouse, and
the surviving spouse elects to treat the custodial account as his or her own. If
the spouse does elect to treat the custodial account as his or her own, as
discussed in the preceding sentence, references to "Depositor" in Articles I
through VII will apply to the spouse as the Depositor's Beneficiary.
Unless specifically designated otherwise in this Agreement, any notice or
report that the Custodian must provide to any person by reason of this Agreement
will be considered to have been provided by the Custodian as of the date it is
sent by first-class mail to the person at his or her most recent address on the
Custodian's records.
To the extent permitted by law, the Custodian may, at its election and upon
the written instructions of the Depositor, pay investment adviser fees from the
Depositor's custodial accounts.
This Agreement is accepted by the Custodian in the Commonwealth of
Massachusetts and will be constructed and administered in accordance with the
laws of the Commonwealth of Massachusetts.
This Agreement is intended to qualify under Section 408 of the Internal
Revenue Code as an Individual Retirement Account, and under Section 219 of the
Internal Revenue Code for any tax-deductibility and limitations of contributions
made to the IRA. If any language or provision of this Agreement can be
interpreted in more than one way, the interpretation of the language or
provision that is consistent with the intention of this Agreement will control.
However, the Custodian and the Mutual Funds (or any company associated with
them) will not be responsible for guaranteeing that the intentions of this
Agreement are met through the use of this Agreement. The Depositor should
consult his or her own attorney for any assurances that the intentions of the
Agreement will be met through the use of this Agreement.
For Roth IRAs: Form 5305-RA (1-98)
SCUDDER ROTH INDIVIDUAL RETIREMENT
CUSTODIAL ACCOUNT AGREEMENT
(Under section 408A of the Internal Revenue Code)
The Depositor whose name appears on the Scudder IRA application or Scudder
Brokerage IRA application is establishing a Roth individual retirement account
(Roth IRA) under Section 408A to provide for his or her retirement and for the
<PAGE>
support of his or her beneficiaries after death. The Custodian named on the
Application has given the Depositor the disclosure statement required under
Regulations Section 1.408-6. The Depositor has deposited with the Custodian the
amount indicated on the Application in cash. The Depositor and the Custodian
make the following agreement:
ARTICLE I
1. If this Roth IRA is not designated as a Roth Conversion IRA, then,
except in the case of a rollover contribution described in Section 408A(e), the
custodian will accept only cash contributions and only up to a maximum amount of
$2,000 for any tax year of the depositor.
2. If this Roth IRA is designated as a Roth Conversion IRA, no
contributions other than IRA Conversion Contributions made during the same tax
year will be accepted.
ARTICLE II
The $2,000 limit described in Article I is gradually reduced to $0 between
certain levels of adjusted gross income (AGI). For a single depositor, the
$2,000 annual contribution is phased out between AGI of $95,000 and $110,000;
for a married depositor who files jointly, between AGI $150,000 and $160,000;
and for a married depositor who files separately, between $0 and $10,000. In the
case of a conversion, the custodian will not accept IRA Conversion Contributions
in a tax year if the depositor's AGI for that tax year exceeds $100,000 or if
the depositor is married and files a separate return. Adjusted gross income is
defined in section 408A(c)(3) and does not include IRA Conversion Contributions.
ARTICLE III
The depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE IV
1. No part of the custodial funds may be invested in life insurance
contracts, nor may the assets of the custodial account be commingled with other
property except in a common trust fund or common investment fund (within the
meaning of section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within
the meaning of section 408(m)), except as otherwise permitted by section
408(m)(3), which provides an exception for certain gold, silver and platinum
coins, coins issued under the laws of any state, and certain bullion.
ARTICLE V
1. If the depositor dies before his or her entire interest is distributed
to him or her and the grantor's surviving spouse is not the sole beneficiary,
the entire remaining interest will, at the election of the depositor or, if the
depositor has not so elected, at the election of the beneficiary or
beneficiaries, either:
(a) Be distributed by December 31 of the year containing the fifth
anniversary of the depositor's death, or
(b) Be distributed over the life expectancy of the designated beneficiary
starting no later than December 31 of the year following the year of
the depositor's death. If distributions do not begin by the date
described in (b), distribution method (a) will apply.
2. In the case of distribution method 1.(b) above, to determine the minimum
annual payment for each year, divide the grantor's entire interest in the trust
as of the close of business on December 31 of the preceding year by the life
expectancy of the designated beneficiary using the attained age of the
designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence and subtract 1 for each subsequent year.
3. If the depositor's spouse is the sole beneficiary on the depositor's
date of death, such spouse will then be treated as the depositor.
ARTICLE VI
1.The depositor agrees to provide the custodian with information necessary
for the custodian to prepare any reports required under sections 408(i) and
408A(d)(3)(E), Regulations sections 1.408-5 and 1.408-6, and under guidance
published by the Internal Revenue Service.
2.The Custodian agrees to submit reports to the Internal Revenue Service
and the depositor prescribed by the Internal Revenue Service.
ARTICLE VII
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through IV and this sentence will be controlling. Any
additional articles that are not consistent with Section 408A, the related
regulations, and other published guidance will be invalid.
ARTICLE VIII
This agreement will be amended from time to time to comply with the
provisions of the code, related regulations, and other published guidance. Other
Amendments may be made with the consent of the persons whose signatures appear
on the application.
ARTICLE IX
1. Please refer to the Scudder IRA Application or Scudder Brokerage IRA
Application, which is incorporated into this Agreement as this paragraph of
Article IX.
2. Depositor's Selection of Investments
<PAGE>
Investment Options
The Depositor may only direct the Custodian to invest custodial funds in
investment shares of the Mutual Funds (regulated investment companies for which
Scudder, Stevens & Clark, Inc., its successor or any affiliates, acts as the
investment adviser and which Scudder Investor Services, Inc., (the
"Distributor") has designated as appropriate for investments in the custodial
account), or in other investments which the Distributor or its successors has
designated as eligible investments for the custodial account.
Investments
As soon as practicable after the Custodian receives the Application, the
Custodian will invest the initial contribution or transfer as the Depositor
directed on the Application in shares of the Mutual Fund(s) or other investments
designated by the Distributor as eligible investments for the custodial account.
With regard to the Mutual Funds listed on the Application and any other Mutual
Fund, the Depositor understands that neither the Custodian nor the Distributor
endorses the Mutual Funds as suitable investments for the custodial account. In
addition, the Custodian (and the Distributor, unless the Distributor otherwise
agrees) will not provide investment advice to the Depositor. The Depositor
assumes all responsibility for the choice of his or her investments in the
custodial account.
The Custodian will invest each subsequent contribution or transfer to the
custodial account as soon as practicable after the Custodian receives the
contribution or transfer, according to the Depositor's instructions for that
subsequent contribution or transfer, in the Mutual Funds or other investment
designated by the Distributor as eligible investments for the custodial account.
If the Depositor's custodial account assets are invested in any Mutual Fund
which terminates or is eliminated, the Custodian will transfer the custodial
account assets in that Mutual Fund to another Mutual Fund designated by the
Distributor unless the Depositor instructs the Custodian otherwise in the manner
required by the Custodian.
If the Custodian receives any investment instructions from the Depositor
which in the opinion of the Custodian are not in good order or are unclear, or
if the Custodian receives any monies from the Depositor which would exceed the
amount that the Depositor may contribute to the custodial account, the Custodian
may hold all or a portion of the monies uninvested pending receipt of written
(or in any other manner permitted by the Distributor) instructions or
clarification. During any such delay the Custodian will not be liable for any
loss of income or appreciation, loss of interest, or for any other loss. The
Custodian may also return all or a portion of the monies to the Depositor.
Again, in such situations, the Custodian will not be liable for any loss.
Unless the Custodian permits otherwise, all dividend and capital gains
distributions received on shares of a Mutual Fund in the custodial account
(unless made in the form of additional shares) will be reinvested in shares of
the same Mutual Fund which paid the distribution, and credited to the custodial
account. All accumulations from other investments will be reinvested in the
Depositor's custodial account according to the Depositor's instructions to the
Custodian which must be in a form acceptable to the Custodian.
The Depositor may change any portion of his or her investment in an
eligible investment to another eligible investment by requesting the change in
the manner the Custodian requires. However, the Distributor reserves the right
to refuse to sell shares of any Mutual Fund when it determines in its own
judgment that the Depositor has made frequent trading in the custodial account.
3. Contributions
All contributions by the Depositor to the custodial account must be in
cash, except for initial contributions of rollovers which may be made in a form
other than cash if permitted by the Distributor.
The Custodian will designate contributions (other than rollover
contributions) as being made for particular years as requested by the Depositor.
If the Depositor does not designate a year for any contribution, the Custodian
will designate the contribution as being made for a particular year according to
a policy established by the Distributor.
If permitted by the Distributor, the Depositor may make rollover
contributions to the custodial account of deductible employee contributions
which were made to qualified employer or government retirement plans as provided
in Internal Revenue Code Section 72(o).
The Depositor warrants that all contributions to the custodial account,
including any rollover contributions, will be made in accordance with the
provisions of the Internal Revenue Code.
Excess Contributions
If the Depositor exceeds the amount that may be contributed to his or her
custodial account for any year, the Custodian will apply such amount as is
allowed by law.
4. Transfers
The Custodian will accept transfers to the custodial account of investments
which the Distributor or its successors have designated as eligible investments
for the custodial account from another custodian or trustee of an individual
retirement account or individual retirement annuity upon the Depositor's
direction. The Custodian will also transfer amounts in the custodial account
upon the request in writing, or in such other manner as agreed upon by the
Custodian, of the Depositor to another custodian or trustee of an individual
retirement account or individual retirement annuity. For such a transfer, the
Custodian may require the written acceptance of the successor custodian. The
Depositor warrants that all transfers to and from the custodial account will be
<PAGE>
made in accordance with the rules and regulations issued by the Internal Revenue
Service.
5. Custodian's Fees
The Custodian is entitled to receive reasonable fees for establishing and
maintaining the custodial account. These fees will be set by the Custodian from
time to time.
The Custodian may change its fee schedule upon thirty (30) days' written
notice to the Distributor.
The Custodian has the right to charge the custodial account, including the
right to liquidate Mutual Fund shares or other investments, or to charge the
Depositor for the Custodian's fees, as well as for any income, gift, estate, and
inheritance taxes (including any transfer taxes incurred in connection with the
investment or reinvestment of the assets of the custodial account), which are
levied or assessed against the custodial account assets, and for all other
administrative expenses of the Custodian for performing its duties, including
any fees for legal services provided to the Custodian.
6. Custodial Account
Once the Custodian mails an acknowledgment of its receipt of the
Application to the Depositor, this Agreement will be effective as of the date
the Depositor signed the Application. As soon as practicable after the Custodian
receives the Application, the Custodian will open and maintain a separate
custodial account for the Depositor.
All Mutual Fund shares or other investments in the custodial account will
be registered in the name of the Custodian (with or without identifying the
Depositor) or in the name of the Custodian's nominee. The Custodian or its agent
will deliver, or cause to be executed and delivered, to the Depositor all
notices, prospectuses, financial statements, proxies, and proxy soliciting
materials which the Custodian or its agent receives which relate to the Mutual
Funds or other investments in the custodial account. The Custodian or its agent
will vote shares only according to the Depositor's instructions on an executed
proxy, provided that the Custodian may without written direction from the
Depositor vote shares "present" solely for purposes of establishing a quorum.
7. Additional Provisions Regarding the Custodian
According to this Agreement, the Custodian will be an agent for the
Depositor for the custodial account to receive and to invest contributions, and
to hold and to distribute these investments as authorized by the Depositor, and
to keep adequate records and provide reports as required by the Agreement. None
of the parties to this Agreement intend to confer any fiduciary duties on the
Custodian, and no such duties shall be implied.
The Custodian may perform any of its administrative duties through other
persons designated by the Custodian from time to time. However, the custodial
account must be registered in the name of the Custodian or its nominee as
provided in paragraph 6 above.
The Custodian assumes no responsibility or liability for collecting
contributions, for the deductibility or propriety of any contribution made to
the custodial account, or for the purpose or propriety of any distributions made
from the custodial account. Those matters are the sole responsibility of the
Depositor.
The Custodian will keep adequate records of transactions it is required to
perform for the custodial account. The Custodian will provide to the Depositor a
written report or reports reflecting the transactions in the custodial account
over each calendar year and the assets in the custodial account as of the end of
the calendar year.
If the Custodian resigns or is removed, as provided in paragraph 10 below,
the Custodian must provide a written report or reports reflecting the
transactions in the custodial account from the last report through the date of
the Custodian's resignation or removal, and the assets in the custodial account
as of the date of the Custodian's resignation or removal.
After providing the end-of-the-year report or the reports from the
Custodian's resignation or removal, the Custodian will be forever released from
all liability and accountability to anyone for its acts or transactions
reflected in the report(s), except those acts or transactions to which the
Depositor (or recipient, if different) has filed a written objection with the
Custodian within 60 days of the date the report was provided to the Depositor or
other recipient.
The Depositor always fully indemnifies the Custodian and will hold it
harmless from any and all liability which may arise from this Agreement, except
that which arises from the Custodian's negligence or willful misconduct. The
Custodian will not be obligated or expected to commence or defend any legal
action or proceeding about this Agreement unless both the Custodian and
Depositor agree and the Custodian will be fully indemnified to its satisfaction.
The Custodian may conclusively rely upon and will be protected from acting
on any written order from or authorized by the Depositor, or any other notice,
request, consent, certificate or other instrument, paper, or other communication
which the Custodian believes to be genuine and issued in proper form with proper
authority, as long as the Custodian acts in good faith in taking or omitting to
take any action in reliance upon the communication.
Before the Beneficiary has notified the Custodian (in the manner required
by the Custodian) of the Depositor's death, the Custodian will not be
responsible for treating the Beneficiary as if he or she has rights and
obligations under this Agreement.
8. Distributions
This paragraph supplements the information found in Article V above, and
must be read in conjunction with it.
The Depositor has sole responsibility to initiate distributions from the
custodial account and sole responsibility to ensure that all distributions are
made in accordance with the applicable provisions of the Internal Revenue Code.
<PAGE>
Distribution Requests
The Depositor* is responsible for making the distribution requests to the
Custodian sufficiently in advance of any requested or required distribution time
to ensure that the distribution will be made before that requested or required
distribution time.
The Custodian will make distributions from the custodial account only after
receiving a request in writing, or in such other manner as agreed upon by the
Custodian, from the Depositor*. The Custodian will make the distribution as soon
as practicable after it receives the request in writing, or in such other manner
as agreed upon by the Custodian.
The Depositor* must make the distribution request in the form required by
the Custodian. The distribution request must include the form of distribution
requested (e.g., lump-sum distribution or installment payments). The Depositor*
must provide to the Custodian any applications, certificates, tax waivers,
signature guarantees and any other documents (including proof of legal
representative's authority) that the Custodian requires. The Custodian will not
be liable for complying with a distribution request that appears on its face to
be genuine, nor will the Custodian be liable for refusing to comply with a
distribution request which the Custodian is not satisfied is genuine.
If the distribution request is not made in the correct form, the Custodian
is not responsible and will not be liable to the Depositor* for any losses while
the Custodian waits for the distribution request to be made in the proper form.
The Depositor* also agrees to fully indemnify the Custodian for any losses which
may result from the Custodian's failing to act upon an improperly made
distribution request.
The Depositor* may request a distribution of any portion of the custodial
account at any time.
The Custodian does not assume any responsibility for the tax treatment of
any distributions from the custodial account.
* or any other party entitled to receive the assets of the custodial
account
Designation of Beneficiary
The Depositor may designate a beneficiary or beneficiaries (the
"Beneficiary") to receive the assets of the custodial account upon the
Depositor's death. The Depositor must designate his or her Beneficiary to the
Custodian in the manner required by the Custodian.
If the Depositor's Beneficiary is not living at the Depositor's death, the
Depositor's estate is entitled to receive the assets of the custodial account.
In addition, to the extent the Depositor has not effectively disposed of the
assets in the custodial account by his or her designation of beneficiary, the
Depositor's estate will be entitled to receive the assets of the custodial
account.
If the Depositor's Beneficiary dies after the Depositor, the Beneficiary's
estate will be entitled to receive the assets of the custodial account.
The Depositor may change his or her choice of a Beneficiary at any time by
notifying the Custodian in the manner required by the Custodian.
Before the Depositor's death, the Depositor's Beneficiary has no right or
power to anticipate any part of the custodial account, or to sell, assign,
transfer, pledge, or hypothecate any part of the account. In addition, the
Custodial account will not be liable for any debts of the Depositor's
Beneficiary or, except as required by law, subject to attachment, execution, or
any other legal process.
Election to Have Life Expectancy Recalculated
For installment payments to be made over the Depositor's life expectancy,
the Depositor may make an election to have the Custodian annually recalculate
his or her life expectancy, and the life expectancy of the Depositor's spouse,
if applicable. The Depositor must make this election in the manner required by
the Custodian.
If the Depositor does not elect to have the Custodian recalculate life
expectancy, the Custodian will not recalculate the life expectancy of any other
party entitled to receive the assets of the custodial account.
9. Amendment
This paragraph supplements the information found in Article VIII above, and
must be read in conjunction with it.
If the Distributor amends this Agreement, it must provide a written notice
of the amendment to both the Depositor and the Custodian. The Depositor will be
considered to have consented to the Distributor's amendment 30 days after the
Distributor has mailed the notice to the Depositor unless within that 30-day
period the Depositor gives the Custodian a proper request in writing, or in such
other manner as agreed upon by the Custodian, for a lump-sum distribution. The
Custodian will be considered to have consented to the Distributor's amendment
unless it notifies the Distributor otherwise within 30 days after the
Distributor has mailed (or otherwise delivered) the notice to the Custodian.
The Custodian may change its fee schedule, as provided in paragraph 5
above, without having to amend this Agreement.
10. Resignation or Removal of Custodian
The Custodian may resign at any time by giving at least 30 days' written
notice to the Distributor. The Distributor may remove the Custodian at any time
by giving at least 30 days' written notice to the Custodian.
If the Custodian resigns or is removed, the Distributor must either appoint
a successor custodian to serve under this Agreement or notify the Depositor that
he or she must appoint a successor custodian. The successor custodian must
provide a written acceptance of its appointment as successor custodian to the
<PAGE>
Custodian. Upon receiving this written acceptance, the Custodian must transfer
to the successor custodian all of the assets and records of the custodial
account.
The Custodian may reserve a portion of the custodial account assets to pay
for any fees, compensation, costs, expenses, or for any liabilities constituting
a charge on or against the Custodian. If any assets remain after paying these
items, the Custodian will pay the remainder to the successor custodian.
If the Custodian resigns or is removed, and the Distributor or the
Depositor has not appointed a successor custodian within 30 days after the
Custodian's resignation or removal (or a longer period, if the Custodian
agrees), the Custodian will terminate this Agreement as provided in paragraph
11, below.
After the Custodian has transferred the custodial account assets to the
successor custodian, the Custodian is relieved of any further liability for this
Agreement, the custodial account, and the custodial account assets.
The Custodian or any successor custodian appointed to serve under this
Agreement must be either 1) a bank as defined in Internal Revenue Code Section
408(n), or 2) such other person who qualifies to serve as prescribed by Internal
Revenue Code Section 408(a)(2) and satisfies the Distributor and the Custodian
that he or she qualifies.
11. Termination of Agreement
As provided in paragraph 10, above, the Custodian will terminate the
Agreement if the Distributor or the Depositor has not appointed a successor
custodian within the specified time after the Custodian resigns or is removed.
If this Agreement is terminated, the Custodian will distribute the custodial
account assets in kind or cash to the Depositor. The Custodian may reserve a
portion of the assets as provided in paragraph 10.
The Depositor may terminate this Agreement at any time by taking a lump-sum
distribution of his or her investment in the custodial account.
After this Agreement has been terminated, it will have no further force and
effect, and the Custodian is relieved of any further liability for this
Agreement, the custodial account, and the custodial account assets.
12. Liquidation of Custodial Account
The Distributor has the right to direct the Custodian by a request in
writing, or in such other manner as agreed upon by the Custodian, to liquidate
the custodial account if the value of the account is below a minimum level
established from time to time by the Distributor on a nondiscriminatory basis.
Once the Custodian receives a request in writing, or in such other manner as
agreed upon by the Custodian, from the Distributor, the Custodian will liquidate
the assets in the custodial account as soon as practicable and distribute the
proceeds to the Depositor in a lump sum in cash or in kind. The Custodian may
reserve a portion of the account to pay for any fees, compensation, costs or
expenses, or for any liabilities constituting a charge on or against the
Custodian. If any assets remain after paying these items, the Custodian will pay
the remainder to the Depositor.
If the custodial account is liquidated as provided above, neither the
Distributor nor the Custodian will be responsible or liable for any penalty or
loss incurred by anyone because of the liquidation. In addition, after the
account is liquidated, both the Distributor and the Custodian will be relieved
from any further liability for this Agreement, the custodial account, and the
custodial account assets.
13. Miscellaneous
Any references in this Agreement to Internal Revenue Code mean the Internal
Revenue Code of 1986, as amended, and any future successors.
Except as provided in the next sentence, any references to "Depositor" in
this Agreement will apply to the Depositor's Beneficiary if the Depositor is
deceased. The references to the "Depositor" in paragraphs 3, 4, and 8 of this
Article IX will apply to the Depositor's Beneficiary only if the Depositor is
deceased, the Depositor's Beneficiary is the Depositor's surviving spouse, and
the surviving spouse elects to treat the custodial account as his or her own. If
the spouse does elect to treat the custodial account as his or her own, as
discussed in the preceding sentence, references to "Depositor" in Articles I
through VIII will apply to the spouse as the Depositor's Beneficiary. (Note,
this highlighted information overrides otherwise conflicting information found
in Article V.3 of this Agreement.)
Unless specifically designated otherwise in this Agreement, any notice or
report that the Custodian must provide to any person by reason of this Agreement
will be considered to have been provided by the Custodian as of the date it is
sent by first-class mail to the person at his or her most recent address on the
Custodian's records.
To the extent permitted by law, the Custodian may, at its election and upon
the written instructions of the Depositor, pay investment adviser fees from the
Depositor's custodial accounts.
This Agreement is accepted by the Custodian in the Commonwealth of
Massachusetts and will be constructed and administered in accordance with the
laws of the Commonwealth of Massachusetts.
This Agreement is intended to qualify under Section 408 of the Internal
Revenue Code as an Individual Retirement Account, and under Section 219 of the
Internal Revenue Code for any tax-deductibility and limitations of contributions
made to the IRA. If any language or provision of this Agreement can be
interpreted in more than one way, the interpretation of the language or
provision that is consistent with the intention of this Agreement will control.
However, the Custodian and the Mutual Funds (or any company associated with
them) will not be responsible for guaranteeing that the intentions of this
Agreement are met through the use of this Agreement. The Depositor should
consult his or her own attorney for any assurances that the intentions of the
Agreement will be met through the use of this Agreement.
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Scudder Municipal Trust:
We consent to the incorporation by reference in Post-Effective Amendment No. 35
to the Registration Statement of Scudder Municipal Trust on Form N-1A, of our
reports dated February 19, 1998 and February 17, 1998 on our audits of the
financial statements and financial highlights of Scudder High Yield Tax Free
Fund and Scudder Managed Municipal Bonds, respectively, which reports are
included in the Annual Reports to Shareholders for the year ended December 31,
1997 which are incorporated by reference in the Post-Effective Amendment to the
Registration Statement.
We also consent to the reference to our Firm under the caption, "Experts."
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Managed Municipal Bonds Annual Report for the period ended December 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER>1
<NAME> SCUDDER MANAGED MUNICIPAL BONDS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 675,179,176
<INVESTMENTS-AT-VALUE> 726,826,465
<RECEIVABLES> 12,966,347
<ASSETS-OTHER> 75,118
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 739,867,930
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,445,069
<TOTAL-LIABILITIES> 2,445,069
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 691,668,397
<SHARES-COMMON-STOCK> 83,437,562
<SHARES-COMMON-PRIOR> 86,659,129
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,029,325)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 51,783,789
<NET-ASSETS> 737,422,861
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,610,656
<OTHER-INCOME> 0
<EXPENSES-NET> 4,731,691
<NET-INVESTMENT-INCOME> 38,878,965
<REALIZED-GAINS-CURRENT> 2,984,085
<APPREC-INCREASE-CURRENT> (12,448,000)
<NET-CHANGE-FROM-OPS> 29,415,050
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (38,878,965)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,821,954
<NUMBER-OF-SHARES-REDEEMED> (12,283,668)
<SHARES-REINVESTED> 2,240,147
<NET-CHANGE-IN-ASSETS> (37,513,663)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8,863,794)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,826,131
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,731,691
<AVERAGE-NET-ASSETS> 747,621,106
<PER-SHARE-NAV-BEGIN> 8.94
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> (0.10)
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.84
<EXPENSE-RATIO> 0.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
High Yield Tax Free Fund Annual Report for the period ended December 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> SCUDDER HIGH YIELD TAX FREE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 271,585,529
<INVESTMENTS-AT-VALUE> 289,153,993
<RECEIVABLES> 5,452,319
<ASSETS-OTHER> 658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 294,606,970
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,505,949
<TOTAL-LIABILITIES> 1,505,949
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 283,748,778
<SHARES-COMMON-STOCK> 24,338,716
<SHARES-COMMON-PRIOR> 24,929,576
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,216,221)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,568,464
<NET-ASSETS> 293,101,021
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,065,431
<OTHER-INCOME> 0
<EXPENSES-NET> 2,658,116
<NET-INVESTMENT-INCOME> 16,407,315
<REALIZED-GAINS-CURRENT> (5,169,621)
<APPREC-INCREASE-CURRENT> 1,246,316
<NET-CHANGE-FROM-OPS> 12,484,010
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,407,315)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,936,365
<NUMBER-OF-SHARES-REDEEMED> (6,435,616)
<SHARES-REINVESTED> 908,391
<NET-CHANGE-IN-ASSETS> (10,778,147)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,048,689)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,006,515
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,779,548
<AVERAGE-NET-ASSETS> 293,312,803
<PER-SHARE-NAV-BEGIN> 12.19
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> (0.15)
<PER-SHARE-DIVIDEND> (0.66)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.04
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
