<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999.
SECURITIES ACT FILE NO. 02-57139
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
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)
(617) 295-2572
(REGISTRANT'S AREA CODE AND TELEPHONE NUMBER)
LYNN S. BIRDSONG
SCUDDER KEMPER INVESTMENTS, INC.
TWO INTERNATIONAL PLACE
BOSTON, MA 02110-4103
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH COPIES TO:
BURTON M. LEIBERT, ESQ. JOHN MILLETTE
WILLKIE FARR & GALLAGHER SCUDDER KEMPER INVESTMENTS, INC.
787 SEVENTH AVENUE TWO INTERNATIONAL PLACE
NEW YORK, NY 10019-6099 BOSTON, MA 02110-4103
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
TITLE OF SECURITIES BEING REGISTERED:
Shares of Beneficial Interest ($.01 par value) of Managed Municipal Bonds,
a Series of the Registrant
-------------------
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Section 24(f) under the Investment Company
Act of 1940; accordingly, no fee is payable herewith because of reliance upon
Section 24(f).
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
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July __, 1999
SCUDDER STATE TAX FREE TRUST
IMPORTANT NEWS
FOR SCUDDER FUND SHAREHOLDERS
[LOGO]
While we encourage you to read the full text of the enclosed Proxy
Statement/Prospectus, here's a brief overview of some matters affecting your
Fund that will be the subject of a shareholder vote.
Q & A: QUESTIONS AND ANSWERS
Q: WHAT IS HAPPENING?
A: You are being asked to vote on an Agreement and Plan of Reorganization
whereby all or substantially all of the assets of Scudder Pennsylvania Tax
Free Fund, a non-diversified series of Scudder State Tax Free Trust, would
be transferred in a tax-free reorganization to Scudder Managed Municipal
Bonds, a series of Scudder Municipal Trust, in exchange for shares of
beneficial interest of Scudder Managed Municipal Bonds. If the Agreement
and Plan of Reorganization is approved and consummated, you would no longer
be a shareholder of Scudder Pennsylvania Tax Free Fund, but would become a
shareholder of Scudder Managed Municipal Bonds, which has similar
investment objectives and policies to your Fund, except as described in the
Proxy Statement/ Prospectus, and is managed by your Fund's investment
manager, Scudder Kemper Investments, Inc. ("Scudder Kemper"). The Board
members of your Fund believe that you will benefit from the proposed
reorganization notwithstanding the fact that, unlike your Fund, income
generated by Scudder Managed Municipal Bonds is subject to Pennsylvania
state taxes and income generated by Scudder Pennsylvania Tax Free Fund is
not, in part, because Scudder Managed Municipal Bonds offers the
opportunity for higher annual income and total return and for lower fees
and expenses than your Fund. The following pages give you additional
information on the proposed reorganization on which you are being asked to
vote.
Q: HOW DO THE BOARD MEMBERS OF MY FUND RECOMMEND THAT I VOTE?
A: AFTER CAREFUL CONSIDERATION, THE BOARD MEMBERS OF YOUR FUND, INCLUDING
THOSE WHO ARE NOT AFFILIATED WITH THE FUND OR SCUDDER KEMPER, RECOMMEND
THAT YOU VOTE FOR THE PROPOSED REORGANIZATION ON THE ENCLOSED PROXY
CARD(S).
<PAGE>
Q: WILL THE FUND PAY FOR THIS PROXY SOLICITATION?
A: No, Scudder Kemper [or its affiliates] will bear these costs.
Q: WHOM DO I CALL FOR MORE INFORMATION?
A: Please call your Fund at 1-800-INSERT.
[LOGO]
[SFT]
2
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SCUDDER STATE TAX FREE TRUST
Two International Place
Boston, Massachusetts 02110
July __, 1999
Dear Shareholders:
You are being asked to vote on an Agreement and Plan of Reorganization
whereby all or substantially all of the assets of Scudder Pennsylvania Tax Free
Fund would be transferred in a tax-free reorganization to Scudder Managed
Municipal Bonds, a series of Scudder Municipal Trust, in exchange for shares of
beneficial interest of Scudder Managed Municipal Bonds. If the Agreement and
Plan of Reorganization is approved and consummated, you would no longer be a
shareholder of Scudder Pennsylvania Tax Free Fund, but would become a
shareholder of Scudder Managed Municipal Bonds, which has similar investment
objectives and policies to your Fund, except as described in the Proxy
Statement/Prospectus.
AFTER CAREFUL REVIEW, THE MEMBERS OF YOUR FUND'S BOARD HAVE APPROVED THE
PROPOSED REORGANIZATION. THE BOARD MEMBERS OF YOUR FUND BELIEVE THAT THE
PROPOSAL SET FORTH IN THE NOTICE OF MEETING FOR YOUR FUND IS IMPORTANT AND
RECOMMEND THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE FOR THE
PROPOSAL.
Your vote is important. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN YOUR
PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. [If we do not
receive your executed proxy card(s) after a reasonable amount of time, you may
receive a telephone call from the Fund reminding you to vote.]
Respectfully,
/s/ Lynn S. Birdsong
Lynn S. Birdsong
President
Scudder State Tax Free Trust
WE URGE YOU TO SIGN AND RETURN YOUR PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID
ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT REGARDLESS OF
THE NUMBER OF SHARES YOU OWN.
<PAGE>
SCUDDER STATE TAX FREE TRUST
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Please take notice that a Special Meeting of Shareholders (the "Special
Meeting") of Scudder State Tax Free Trust (the "Trust"), on behalf of its
series, Scudder Pennsylvania Tax Free Fund (the "Fund"), will be held at the
offices of Scudder Kemper Investments, Inc., 13th Floor, Two International
Place, Boston, Massachusetts 02110, on September 2, 1999, at [11:00 a.m.],
Eastern time, for the following purposes:
PROPOSAL 1: To approve an Agreement and Plan of Reorganization for the
Fund;
PROPOSAL 2: To transact such other business as may properly come
before the meeting or any adjournment(s) thereof.
The appointed proxies will vote in their discretion on any other business
as may properly come before the Special Meeting or any adjournments thereof.
Holders of record of shares of the Fund at the close of business on
[INSERT], 1999 are entitled to vote at the Special Meeting and at any
adjournments thereof.
In the event that the necessary quorum to transact business or the vote
required to approve a Proposal is not obtained at the Special Meeting, the
persons named as proxies may propose one or more adjournments of the Special
Meeting in accordance with applicable law to permit further solicitation of
proxies. Any such adjournment as to a matter will require the affirmative vote
of the holders of a majority of the Fund's shares present in person or by proxy
at the Special Meeting. The persons named as proxies will vote in favor of such
adjournment those proxies which they are entitled to vote in favor of the
Proposal and will vote against any such adjournment those proxies to be voted
against the Proposal.
By Order of the Board of Trustees
/s/ John Millette
John Millette
Secretary
July __, 1999
IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN
IT IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND IS INTENDED
FOR YOUR CONVENIENCE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) MAY SAVE
THE NECESSITY AND EXPENSE OF FURTHER SOLICITATIONS TO ENSURE A QUORUM AT THE
SPECIAL MEETING. IF YOU CAN ATTEND THE SPECIAL MEETING AND WISH TO VOTE YOUR
SHARES IN PERSON AT THAT TIME, YOU WILL BE ABLE TO DO SO.
<PAGE>
TABLE OF CONTENTS
PROPOSAL: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION.....................3
SYNOPSIS.......................................................................4
PRINCIPAL RISK FACTORS........................................................10
THE PROPOSED TRANSACTION......................................................16
ADDITIONAL INFORMATION ABOUT MUNICIPAL BONDS..................................22
ADDITIONAL INFORMATION........................................................23
i
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ADDITIONAL MATERIALS
The following additional materials, which have been incorporated by
reference into the Statement of Additional Information dated July __, 1999
relating to this Combined Prospectus/Proxy Statement and the Reorganization,
will be sent to all shareholders of Tax Free requesting a copy of such Statement
of Additional Information.
1. The Statement of Additional Information for Municipal Bonds, dated March
1, 1999.
2. The current Statement of Additional Information for Tax Free.
ii
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 17, 1999
PROXY STATEMENT/PROSPECTUS
JULY ___, 1998
RELATING TO THE ACQUISITION BY
SCUDDER MANAGED MUNICIPAL BONDS ("MUNICIPAL BONDS"),
A SERIES OF SCUDDER MUNICIPAL TRUST (THE "MUNICIPAL TRUST"),
Two International Place
Boston, MA 02110-4103
(800) 225-2470
OF THE ASSETS OF
SCUDDER PENNSYLVANIA TAX FREE FUND ("TAX FREE"),
A SERIES OF SCUDDER STATE TAX FREE TRUST (THE "STATE TRUST").
GENERAL
This Proxy Statement/Prospectus is furnished to shareholders of Tax Free in
connection with a proposed reorganization in which all or substantially all of
the assets of Tax Free would be acquired by Municipal Bonds, in exchange solely
for voting shares of beneficial interest of Municipal Bonds and the assumption
by Municipal Bonds of all of the liabilities of Tax Free (collectively, the
"Reorganization"). Shares of Municipal Bonds thereby received would then be
distributed to the shareholders of Tax Free in complete liquidation of Tax Free,
and Tax Free would be abolished as a series of the State Trust. As a result of
the Reorganization, each shareholder of Tax Free would receive that number of
full and fractional shares of Municipal Bonds having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares of Tax
Free held as of the close of business on the business day preceding the closing
of the Reorganization. Shareholders of Tax Free are being asked to vote on an
Agreement and Plan of Reorganization pursuant to which such transactions, as
described more fully below, would be consummated.
This Proxy Statement/Prospectus, which should be retained for future
reference, sets forth concisely the information about Municipal Bonds that a
prospective investor should know before investing. For a more detailed
discussion of the investment objectives, policies, restrictions and risks of
Municipal Bonds, see the prospectus for Municipal Bonds, dated March 1, 1999, as
supplemented from time to time, which is included herewith and incorporated
herein by reference. This Proxy Statement/Prospectus is also accompanied by
Municipal Bonds' annual report to
-----------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROSPECTUS/PROXY
STATEMENT AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS.
<PAGE>
shareholders for the year ended December 31, 1998. For a more detailed
discussion of the investment objectives, policies, restrictions and risks of Tax
Free, see the prospectus for Tax Free, dated August 1, 1998, which is
incorporated herein by reference and a copy of which may be obtained without
charge by writing to Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103, or by calling toll-free (800) 225-2470. A Statement of
Additional Information of the Municipal Trust and State Trust dated July __,
1999 containing additional information about the Reorganization and the parties
thereto has been filed with the Securities and Exchange Commission (the "SEC" or
the "Commission") and is incorporated by reference into this Proxy
Statement/Prospectus. A copy of the Statement of Additional Information is
available upon request and without charge by writing to or calling Scudder
Investor Services, Inc. at the address or phone number listed above. Shareholder
inquiries regarding Tax Free or Municipal Bonds may also be made by calling the
phone number listed above. The information contained herein concerning Tax Free
has been provided by, and is included herein in reliance upon, Tax Free. The
information contained herein concerning Municipal Bonds has been provided by,
and is included herein in reliance upon, Municipal Bonds.
Municipal Bonds is a diversified series of shares of beneficial interest of
the Municipal Trust, an open-end management investment company organized as a
Massachusetts business trust. Tax Free is a non-diversified series of shares of
beneficial interest of the State Trust, an open-end management investment
company organized as a Massachusetts business trust. The principal investment
objective of Municipal Bonds is to provide income exempt from regular federal
income tax primarily through investment in high-grade, long-term municipal
securities. The principal investment objective of Tax Free is to provide
Pennsylvania taxpayers with income exempt from both Pennsylvania personal income
tax and regular federal income tax.
-----------------------
In the descriptions of the Proposal below, the word "fund" is sometimes
used to mean investment companies or series thereof in general, and not Tax Free
whose proxy statement this is. In addition, in this Proxy Statement/ Prospectus,
for simplicity, actions are described as being taken by either Tax Free or
Municipal Bonds (each a "Fund" and collectively the "Funds"), although all
actions are actually taken by the State Trust or the Municipal Trust,
respectively, on behalf of its applicable series.
This Proxy Statement/Prospectus, the Notice of Special Meeting and the
proxy card(s) are first being mailed to shareholders on or about July __, 1999
or as soon as practicable thereafter. Any Tax Free shareholder giving a proxy
has the power to revoke it by mail (addressed to the Secretary at the principal
executive office of Scudder Pennsylvania Tax Free Fund, c/o Scudder Kemper
Investments, Inc., at the address for the State Trust shown at the beginning of
this Proxy Statement/Prospectus) or in person at the Special Meeting, by
executing a superseding proxy or by submitting a notice of revocation to Tax
Free. All properly executed proxies received in time for the Special Meeting
will be voted as specified in the proxy or, if no specification is made, in
favor of the Proposals referred to in the Proxy Statement.
The presence at any shareholders' meeting, in person or by proxy, of the
holders of a majority of the shares of Tax Free entitled to be cast shall be
necessary and sufficient to constitute
2
<PAGE>
a quorum for the transaction of business. In the event that the necessary quorum
to transact business or the vote required to approve any Proposal is not
obtained at the Special Meeting, the persons named as proxies may propose one or
more adjournments of the Special Meeting in accordance with applicable law to
permit further solicitation of proxies with respect to the Proposal that did not
receive the vote necessary for its passage or to obtain a quorum. Any such
adjournment as to a matter will require the affirmative vote of the holders of a
majority of Tax Free's shares present in person or by proxy at the Special
Meeting. The persons named as proxies will vote in favor of such adjournment
those proxies which they are entitled to vote in favor of that Proposal and will
vote against any such adjournment those proxies to be voted against that
Proposal. For purposes of determining the presence of a quorum for transacting
business at the Special Meeting, abstentions and broker "non-votes" will be
treated as shares that are present but which have not been voted. Broker
non-votes are proxies received by Tax Free from brokers or nominees when the
broker or nominee has neither received instructions from the beneficial owner or
other persons entitled to vote nor has discretionary power to vote on a
particular matter. Accordingly, shareholders are urged to forward their voting
instructions promptly.
The Proposal requires the affirmative vote of the holders of a majority of
Tax Free's shares outstanding and entitled to vote thereon. Abstentions and
broker non-votes will have the effect of a "no" vote on the Proposal.
Holders of record of the shares of Tax Free at the close of business on
July 6, 1999 (the "Record Date"), as to any matter on which they are entitled to
vote, will be entitled to one vote per share on all business of the Special
Meeting. As of June 1, 1999, there were [INSERT] shares of Tax Free outstanding.
To the best of the State Trust's knowledge, as of June 1, 1999, [no person
owned beneficially more than 5% of Tax Free's outstanding shares].
Appendix 1 hereto sets forth the number of shares of Tax Free owned
directly or beneficially by the Trustees of the State Trust.
Each of Tax Free and Municipal Bonds provides periodic reports to all of
its shareholders which highlight relevant information, including investment
results and a review of portfolio changes. You may receive an additional copy of
the most recent annual report for each of Tax Free and Municipal Bonds and a
copy of any more recent semi-annual report, without charge, by calling
800-225-2470 or writing to Tax Free or Municipal Bonds, c/o Scudder Kemper
Investments, Inc., at the address shown at the beginning of this Proxy
Statement/Prospectus.
PROPOSAL: APPROVAL OF AGREEMENT
AND PLAN OF REORGANIZATION
The Board of Trustees of each of the Municipal Trust and the State Trust,
including all of the Trustees who are not "interested persons" of such Trust (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) (the
"Non-Interested Trustees" or "Non-Interested Board Members"), approved on May 3,
1999 an Agreement and Plan of Reorganization dated as of [INSERT], 1999 (the
"Plan"). Subject to its approval by the
3
<PAGE>
shareholders of Tax Free, the Plan provides for (a) the transfer of all or
substantially all of the assets and all of the liabilities of Tax Free to
Municipal Bonds, a series of shares of beneficial interest of the Municipal
Trust, in exchange for voting shares of Municipal Bonds and assumption of Tax
Free's liabilities; (b) the distribution of such Municipal Bonds shares to the
shareholders of Tax Free in complete liquidation of Tax Free; and (c) the
abolition of Tax Free as a series of the State Trust (collectively, the
"Reorganization"). As a result of the Reorganization, each shareholder of Tax
Free will become a shareholder of Municipal Bonds and will hold, immediately
after the closing of the Reorganization (the "Closing"), that number of full and
fractional shares of Municipal Bonds having an aggregate net asset value equal
to the aggregate net asset value of such shareholder's shares held in Tax Free
as of the close of business on the business day preceding the Closing (the
"Valuation Date"). The Closing is expected to occur on September 20, 1999, or on
such later date as the parties may agree in writing (the "Closing Date").
SYNOPSIS
The following is a summary of certain information contained in this Proxy
Statement/Prospectus. This summary is qualified by reference to the more
complete information contained elsewhere in this Proxy Statement/Prospectus, the
Prospectus of Municipal Bonds, the Prospectus of Tax Free and the Plan, the form
of which is attached to this Proxy Statement/Prospectus as Exhibit A.
Shareholders should read this entire Proxy Statement/Prospectus carefully.
INTRODUCTION
Scudder Kemper Investments, Inc., a Delaware corporation located at Two
International Place, Boston, Massachusetts 02110-4103 ("Scudder Kemper" or the
"Investment Manager"), is the investment manager of both Tax Free and Municipal
Bonds, which also have the same custodian, fund accounting agent and transfer
agent. If the Plan is consummated, Tax Free shareholders will continue to enjoy
the same shareholder privileges, such as the ability to buy, exchange and sell
shares without paying a sales commission, access to professional service
representatives, and automatic dividend reinvestment, as shareholders of
Municipal Bonds. Each of Tax Free and Municipal Bonds declares dividends daily
and pays dividends monthly. See "Dividends and Other Distributions." It is a
condition of the Reorganization that each Trust receive an opinion of
independent legal counsel that the Reorganization will be tax-free. This means
that shareholders will not realize any capital gain or loss as a direct result
of the Reorganization.
PROPOSED TRANSACTION
The aggregate net asset value of Municipal Bonds voting shares (the
"Shares") issued in exchange for the assets and liabilities of Tax Free will be
equal to the net asset value of Tax Free as of the Valuation Date. Immediately
following the transfer of Shares to the State Trust, the Shares received by Tax
Free will be distributed pro rata to the shareholders of record of Tax Free on
the Closing Date and the shares of Tax Free will be cancelled.
4
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For the reasons described below under "The Proposed Transaction-Reasons for
the Proposed Transaction," the Board of Trustees of the State Trust, including
the Non-Interested Trustees, has concluded the following:
- the Reorganization is in the best interests of Tax Free and its
shareholders; and
- the interests of the existing shareholders of Tax Free will not be
diluted as a result of the Reorganization.
Accordingly, the Trustees recommend approval of the Plan. If the Plan is
not approved, Tax Free will continue in existence unless other action is taken
by the Trustees; such other action may include termination and liquidation of
Tax Free.
INVESTMENT OBJECTIVE AND POLICIES OF SCUDDER MUNICIPAL BONDS FUND
Municipal Bonds seeks to provide income exempt from regular federal income
tax primarily through investment in high-grade, long-term municipal securities.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Municipal Bonds' net assets be investment
in municipal securities. Under normal market conditions, however, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
Municipal securities include notes and bonds issued by states, cities and towns
to raise revenue for various public activities. 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. The Fund
pursues its goal by investing at least 65% of its net assets in high-quality
tax-exempt municipal securities with independent credit ratings of Aaa, Aa and A
from Moody's Investors Service, Inc. ("Moody's"); AAA, AA and A from Standard &
Poor's Corporation ("S&P") or Fitch IBCA, Inc. ("Fitch"); or their unrated
equivalents, as determined by Scudder Kemper.
Municipal Bonds may also invest up to 10% of its assets in debt securities
rated Baa/BBB or lower, but will not purchase any bonds rated below B. The Fund
has the flexibility to invest in municipal securities with short-
(dollar-weighted average effective maturity between one and five years), medium-
(five and 10 years), and long-term (more than 10 years) maturities. During
recent years, the Fund's portfolio has been invested primarily in long-term
municipal bonds. In managing its portfolio, the Fund attempts to take advantage
of opportunities in the market caused by such factors as temporary yield
disparities among issues or classes of securities in an attempt to improve total
return.
Municipal Bonds may invest more than 25% of its assets in industrial
development or other private activity bonds, subject to the Fund's 20%
limitation on investing in municipal securities whose investment income is
taxable or subject to the alternative minimum tax and the Fund's current
intention not to invest in municipal securities whose investment income is
subject to regular federal income tax. The Fund may, but is not required to,
invest up to 20% of its assets in cash or in short-term taxable investments,
including U.S. Government obligations and money
5
<PAGE>
market instruments. Normally, however, the Fund expects to be fully invested in
tax-exempt securities.
Municipal Bonds may invest in when-issued securities and may write (sell)
covered call and put options on securities in which it may invest, purchase and
sell call and put options on securities and fixed-income indices and may enter
into various transactions such as swaps, caps, collars or floors. Municipal
Bonds may enter into interest-rate and fixed-income indices futures contracts
and may purchase and sell put and call options on these contracts.
INVESTMENT OBJECTIVE AND POLICIES OF SCUDDER PENNSYLVANIA TAX FREE FUND
Tax Free seeks to provide Pennsylvania taxpayers with income exempt from
both Pennsylvania personal income tax and regular federal income tax. Under
normal market conditions, Tax Free expects to invest principally in Pennsylvania
municipal securities with long-term maturities (i.e., more than 10 years). Tax
Free has the flexibility, however, to invest in Pennsylvania municipal
securities with short- and medium-term maturities as well.
Tax Free may also invest up to 20% of its total assets in municipal
securities the interest income from which is taxable or subject to the
alternative minimum tax ("AMT" bonds). Distributions from interest on certain
municipal securities subject to the alternative minimum tax such as private
activity bonds, will be a preference item for purposes of calculating individual
and corporate alternative minimum taxes, depending upon investors' particular
situations. In addition, state and local taxes may apply, depending upon your
state and local tax laws.
Ordinarily, Tax Free expects that 100% of its portfolio securities will be
Pennsylvania municipal securities. The Fund may also hold cash or invest its
assets in taxable securities. The Fund may invest in stand-by commitments, third
party puts, illiquid securities, when-issued or forward delivery securities, and
enter into repurchase agreements and reverse repurchase agreements, which may
involve certain expenses and risks, including credit risks. These securities and
techniques are not expected to comprise a major portion of the Fund's
investments. The Fund may engage in strategic transactions for hedging purposes
and to seek gain. See "Investment Practices of Tax Free and Municipal Bonds" for
more information about these investment techniques.
Normally, at least 75% of the intermediate- and long-term securities
purchased by Tax Free will be investment-grade municipal securities which are
those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or Fitch or
unrated securities judged by Scudder Kemper to be of equivalent quality, or
securities issued or guaranteed by the U.S. Government. The Fund may also invest
up to 25% of its total assets in fixed-income securities rated below
investment-grade, that is, rated below Baa by Moody's or below BBB by S&P or
Fitch, or in unrated securities of equivalent quality as determined by Scudder
Kemper. The Fund may not invest in fixed-income securities rated below B by
Moody's, S&P or Fitch, or their equivalent.
Tax Free expects to invest principally in securities rated A or better by
Moody's, S&P or Fitch or unrated securities judged by Scudder Kemper to be of
equivalent quality at the time of
6
<PAGE>
purchase. Securities in these three rating categories are judged by Scudder
Kemper to have an adequate if not strong capacity to repay principal and pay
interest.
A portion of the Tax Free's income may be subject to federal, state and
local income taxes.
INVESTMENT MANAGEMENT FEES AND EXPENSES
State Trust and Municipal Trust each retains Scudder Kemper, pursuant to
separate contracts, to manage the daily investment and business affairs of Tax
Free and Municipal Bonds, respectively, subject to the policies established by
the Trustees. The expenses of each Fund are paid out of gross investment income.
Shareholders pay no direct charges or fees for investment services.
SCUDDER MANAGED MUNICIPAL BONDS
The Investment Manager receives an investment management fee as
compensation for its services on behalf of Municipal Bonds. For these services,
Municipal Bonds pays the Investment Manager a fee at an annual rate 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. The fee is graduated so that increases in Municipal Bonds' net assets
may result in a lower annual fee rate and decreases in its net assets may result
in a higher annual fee rate. The fee is payable monthly, provided that Municipal
Bonds will make such interim payments as may be requested by the Investment
Manager not to exceed 75% of the amount of the fee then accrued on the books of
Municipal Bonds and unpaid. As of December 31, 1998, Municipal Bonds had total
net assets of approximately $737,000,000. The total investment management fees
incurred and paid by Municipal Bonds for the year ended December 31, 1998 were
$3,760,257.
For the year ended December 31, 1998, Municipal Bonds' total expense ratio
(total annual operating expenses as a percentage of average net assets) was
0.62%. The Investment Manager projects that if the proposed Reorganization is
effected, the expense ratio of Municipal Bonds will be unchanged for the year
ending December 31, 1999. The actual expense ratio for Municipal Bonds for the
year ending December 31, 1999 may be higher or lower than 0.62%, depending upon
Municipal Bonds' performance, general bond market and economic conditions, sales
and redemptions of Municipal Bonds shares (including redemptions by former Tax
Free shareholders), and other factors.
SCUDDER PENNSYLVANIA TAX FREE FUND
The Investment Manager receives an investment management fee as
compensation for its services on behalf of Tax Free. For these services, Tax
Free pays the Investment Manager a monthly fee of 1/20 of 1% (approximately
0.60% on an annual basis) of average daily net assets. The fee is payable
monthly, provided that Tax Free will make such interim payments as may be
requested by the Investment Manager not to exceed 75% of the amount of the fee
then accrued on the books of Tax Free and unpaid. As of March 31, 1999, Tax Free
had total net assets of approximately $85,000,000. The total investment
management fees incurred by Tax Free for the year ended March 31, 1999 were
$497,129, of which only $241,359 was imposed.
7
<PAGE>
For the year ended March 31, 1999, Tax Free's annualized total expense
ratio (total annual operating expenses as a percentage of average net assets)
was [0.52%], including waivers and reimbursements. The Investment Manager has
voluntarily agreed, with respect to Tax Free, not to impose all or a portion of
its management fee and to maintain the annualized expenses of Tax Free at not
more than 0.75% of the Fund's average daily net assets only until July 31, 1999.
The Investment Manager retains the ability to be paid by the Fund if expenses
fall below the specified limit prior to the end of the fiscal year. These
expense limitation arrangements decreased the Fund's expenses and improve its
performance. If the Investment Manager had not agreed to waive its fee and
reimburse other expenses, the total annualized expenses of Tax Free for the year
ended March 31, 1999 would have been [.91%] (investment management fee [0.60%]
and other expenses [0.31%]). The Investment Manager is not obligated to continue
its fee waivers and expense reimbursements after July 31, 1999 [and has informed
the Board of Tax Free that it intends to discontinue its fee waiver and expense
reimbursement if the proposed Reorganization is not approved by Tax Free
shareholders]. As demonstrated by the table below, shareholders of Tax Free may
experience a decrease in expenses with respect to the Shares received pursuant
to the Reorganization if the Investment Manager were to discontinue its fee
waivers and expense reimbursements after July 31, 1999.
The expenses of Tax Free and Municipal Bonds for the fiscal year ended
March 31, 1999 and December 31, 1998, respectively, and pro forma expenses
following the proposed restructuring are outlined below:
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MUNICIPAL
TAX FREE(1) BONDS PRO FORMA
----------- ----- ---------
(with waiver) (without waiver)
<S> <C> <C> <C> <C>
Investment
Management Fee.................. 0.21% 0.60% 0.51% 0.51%
12b-1 Fees...................... NONE NONE NONE NONE
Other Expenses.................. 0.31% 0.31% 0.11% 0.11%
Total Fund Operating
Expenses....................... 0.52% 0.92% 0.62% 0.62%
- ------------------
(1) Until July 31, 1999, the Adviser has agreed to waive and/or reimburse all
or a portion of its management fee and expenses to the extent necessary
so that annualized expenses of Tax Free do not exceed 0.75% of average
daily net assets.
</TABLE>
Example. Based on the level of total operating expenses for each of Tax
Free and Municipal Bonds listed in the table above for the fiscal year ended
March 31, 1999 and December 31, 1998, respectively, the total expenses relating
to a $10,000 investment, assuming a 5% annual return and redemption at the end
of each period, are listed below. Investors do not
8
<PAGE>
pay these expenses directly; they are paid by the Fund before it distributes its
net investment income to stockholders. Actual expenses may be greater or less
than those shown. Federal regulations require the example to assume a 5% annual
return, but actual annual return will vary.
<TABLE>
<CAPTION>
MUNICIPAL
TAX FREE BONDS PRO FORMA
-------- ----- ---------
(with waiver) (without waiver)
<S> <C> <C> <C> <C>
1 Year.......................... $ XX $ XX $ 63 $ 63
3 Years......................... $ XXX $ XXX $ 199 $ 199
5 Years......................... $ XXX $ XXX $ 346 $ 346
10 Years........................ $ XXX $ XXX $ 774 $ 774
</TABLE>
This example assumes reinvestment of all dividends and distributions and that
the percentage amounts listed above under "Total Fund Operating Expenses" remain
the same each year. This example should not be considered a representation of
past or future expenses. Actual Fund expenses can vary from year to year and may
be higher or lower than those shown.
DISTRIBUTION OF SHARES AND OTHER SERVICES
Scudder Investor Services, Inc. ("SIS"), Two International Place, Boston,
Massachusetts 02110, a subsidiary of the Investment Manager, is the principal
underwriter of both Tax Free and Municipal Bonds. SIS charges no direct fees
whatsoever in connection with the distribution of shares of the Funds. Scudder
Service Corporation ("SSC"), also a subsidiary of the Investment Manager, is the
transfer and dividend-paying agent for the Funds. Scudder Fund Accounting
Corporation ("SFAC"), also a subsidiary of the Investment Manager, is
responsible for determining the daily net asset value per share and maintaining
the general accounting records of each Fund. State Street Bank and Trust Company
is each Fund's custodian. Scudder Trust Company ("STC"), an affiliate of the
Investment Manager, is trustee or custodian for certain tax-advantaged
retirement plans designed for use with each Fund and is paid an annual fee for
some of those plans.
PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
The purchase, redemption and exchange procedures and privileges with
respect to Tax Free are identical to those of Municipal Bonds. Both funds are
no-load, imposing no front-end or back-end sales charges, and no Rule 12b-1
fees.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund intends to distribute dividends from its net investment income
monthly and any 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 necessary. Any
dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar
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<PAGE>
year in which it is declared. Dividends and distributions of each Fund will be
invested in additional shares of the applicable Fund at net asset value and
credited to the shareholder's account on the payment date or, at the
shareholder's election, paid in cash.
If the Plan is approved by Tax Free's shareholders, then as soon as
practicable before the Closing Date, Tax Free will pay its shareholders a cash
distribution of all undistributed 1999 net investment income and undistributed
realized net capital gains.
TAX CONSEQUENCES
Municipal Bonds and Tax Free will have received an opinion of Willkie Farr
& Gallagher, counsel to each Fund, Municipal Trust and State Trust in connection
with the Reorganization, to the effect that, based upon certain facts,
assumptions and representations, the Reorganization will constitute a tax-free
reorganization within the meaning of section [368(a)(1)] of the Internal Revenue
Code of 1986, as amended (the "Code"). If the Reorganization constitutes a
tax-free reorganization, no gain or loss will be recognized by Tax Free or its
shareholders as a direct result of the Reorganization. See "The Proposed
Transaction -- Federal Income Tax Consequences."
PRINCIPAL RISK FACTORS
Municipal Bonds may invest in a wider range of debt obligations than Tax
Free and may engage in several investment techniques that Tax Free cannot. In
addition, unlike Tax Free, Municipal Bonds is a diversified fund which is not
targeted only to obligations of Pennsylvania (or other qualifying) issuers.
Municipal Bonds is also subject to a stricter investment limitation with respect
to securities rated below investment grade. Tax Free invests at least 75% of net
assets in intermediate- and long-term investment grade municipal securities, and
up to 25% of net assets in below investment grade securities. Municipal Bonds
may invest only 10% of its net assets in below investment grade securities. Each
Fund may invest in short-, medium- and long-term debt obligations
The skill of Municipal Bond's portfolio management team in choosing
appropriate investments for Municipal Bonds will determine in large part the
Fund's ability to achieve its investment objective. In addition, as with most
tax-free bond funds, a major factor affecting the Fund's performance is interest
rates. Because the Fund intends to have a longer duration, the interest rate
risk is greater in this Fund than in a fund that does not intend to be
principally invested in municipal securities with long-term maturities. When
interest rates rise, the price of bonds (and tax-free bond funds) typically fall
in proportion to their duration. The Fund may have lower returns than other
funds that invest in lower-quality municipal securities. Municipal securities in
the Fund's portfolio could be downgraded or go into default.
Mortgage-backed securities bear the risk of unscheduled or early payments
on the underlying mortgages which will shorten the securities' effective
maturities and lessen their growth potential. This prepayment risk is greater in
a period of declining interest rates. Foreign securities bear special
considerations, including higher brokerage costs, currency risk and a greater
likelihood of delayed settlement. Securities rated BBB by S&P or Baa by Moody's
are neither highly protected nor poorly secured. These securities normally pay
higher yields but
10
<PAGE>
involve potentially greater price variability than higher-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. Such securities may have
speculative elements as well as investment-grade characteristics.
An investment in Tax Free may potentially entail higher credit risk than an
investment in Municipal Bonds. Whereas Tax Free is a non-diversified fund which
limits its investments to issuers of municipal securities located in
Pennsylvania or other qualifying issuers, Municipal Bonds is a diversified fund
which may invest in municipal securities of issuers without regard to their
location. As a "diversified" fund, Municipal Bonds (with respect to 75% of its
total assets) may not purchase greater than (i) 5% of the total assets and (ii)
10% of the outstanding voting securities, in each case, of any one issuer. Tax
Free, unlike Municipal Bonds, however, offers its shareholders income which is
exempt from Pennsylvania state tax.
Finally, each Fund may write covered options to enhance income and engage
in various hedging strategies involving options on fixed-income securities,
indices and futures contracts. These investment techniques entail transaction
costs and may provide no benefit (or may cause a Fund to incur a loss) if
securities, indices or interest rates move in an unanticipated manner.
Please refer to each Fund's prospectus and statement of additional
information for a more detailed discussion of the risks of investing in the
applicable Fund.
PRINCIPAL INVESTMENTS OF SCUDDER MANAGED MUNICIPAL BONDS
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Municipal Bonds' net assets will normally
be invested in municipal bonds. Under normal market conditions, the Fund expects
to invest 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 Municipal Bonds 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. Municipal Bonds may also invest in other municipal
securities such as variable rate demand instruments.
11
<PAGE>
Municipal Bonds 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, Municipal Bonds 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 Scudder Kemper, 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 Scudder Kemper, 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 Scudder Kemper. Should the rating of a
portfolio security be downgraded after being purchased by the Fund, Scudder
Kemper 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.
Municipal Bonds 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.
In addition, Municipal Bonds may use investment techniques such as
purchasing securities on a when-issued or forward delivery basis; entering into
interest-rate or securities-index futures contracts, and purchasing and selling
options thereon; purchasing and selling options on securities and indices, and
entering into forward contracts. These transactions have risks associated with
them, including possible default by the other party to the transaction,
illiquidity and, to the extent Scudder Kemper's view as to certain market
movements is incorrect, the risk that the use of such 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 Fund, force the 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 the Fund can realize on its investments or cause the Fund to
hold a security it might otherwise sell. The variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be
12
<PAGE>
liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon 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 hedging
transactions would reduce net asset value, and possible income, and such losses
can be greater than if such transactions had not been utilized.
PRINCIPAL INVESTMENTS OF SCUDDER PENNSYLVANIA TAX FREE FUND
Tax Free invests in municipal securities of issuers located in Pennsylvania
and other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
income from these obligations is exempt from both Pennsylvania personal income
tax and regular federal income tax ("Pennsylvania municipal securities"). These
securities include 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, and
revenue bonds, which may be issued to finance projects owned or used by either
private or public entities and which include bonds issued to finance industrial
enterprises and pollution control facilities. The Fund may invest in other
municipal securities such as variable rate demand instruments. The Fund may also
invest in municipal notes of issuers located in Pennsylvania and other
qualifying issuers. They 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. 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.
INVESTMENT PRACTICES OF TAX FREE AND MUNICIPAL BONDS
Tax Free and Municipal Bonds may engage in certain investments and
investment techniques that are substantially the same. The following is a brief
description of these investment practices. Municipal Bonds may engage in certain
additional investment practices, as described above, and a more complete
description is contained in the prospectus of Municipal Bonds, dated March 1,
1999, as supplemented from time to time, a copy of which is included herewith,
and in the Statement of Additional Information of the Municipal Trust and the
State Trust dated July __, 1999 (relating to the proposed Reorganization) which
is incorporated herein by reference.
Municipal Securities. Each Fund may invest in municipal securities, which
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 and (in certain instances) state income
tax in the hands of most investors, except for the possible applicability of the
13
<PAGE>
alternative minimum tax. The two principal classifications of municipal
securities are "Notes" and "Bonds."
Eurodollar Instruments. Each 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. Each 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.
Illiquid securities. Each Fund may invest a portion of its assets 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 a Fund may be not be
able to dispose of them at an advantageous time or price.
Repurchase agreements. As a means of earning taxable income for periods as
short as overnight, each Fund may enter into repurchase agreements with selected
banks and broker/dealers. Under a repurchase agreement, a Fund acquires
securities, subject to the seller's agreement to repurchase at a specified time
and price. Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments. To facilitate liquidity, each Fund may enter into
"stand-by commitments" permitting it to resell municipal securities to the
original seller at a specified price. Stand-by commitments generally involve no
cost to a Fund, and any costs would be, in any event, limited to no more than
0.50% of the value of the total assets of the Fund. Any such costs may, however,
reduce yield.
Strategic Transactions and Derivatives. Each 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 each Fund's
portfolio, or to enhance potential gain. These strategies may be executed
through the use of derivatives 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, each 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 the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit to attempt to protect against possible changes in the
market value of securities held in or to be purchased for each Fund's portfolio
resulting from securities markets fluctuations, to protect each Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such
14
<PAGE>
securities for investment purposes, to manage the effective maturity or duration
of each 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 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.
Combined Transactions. Each 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 Scudder Kemper, 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 Investment Manager'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 each Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. Each 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. Each 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.
Each 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 the 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, Scudder
Kemper and each 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
15
<PAGE>
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 a nationally
recognized statistical rating organization (an "NRSRO") or is determined to be
of equivalent credit quality by Scudder Kemper. If there is a default by the
counterparty, each 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.
Third party puts. Each Fund 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 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.
When-issued securities. Each Fund 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 a Fund. At the
time of settlement, the market value of the security may be more or less than
the purchase price.
INVESTMENT RESTRICTIONS
Tax Free's investment restrictions are substantially identical to Municipal
Bonds' investment restrictions, except, where Municipal Bonds has a fundamental
policy of investing 80% of its net assets in municipal securities, Tax Free has
a fundamental policy of investing 80% of its net assets in municipal securities
of issuers located in Pennsylvania and other qualifying issuers. Investment
restrictions of each Fund which are fundamental policies may not be changed
without the approval of Fund shareholders. Investors should refer to the
respective Statements of Additional Information of Tax Free and Municipal Bonds
for a fuller description of each Fund's investment policies and restrictions.
THE PROPOSED TRANSACTION
Description of the Plan. As stated above, the Plan provides for the
transfer of all or substantially all of the assets of Tax Free to Municipal
Bonds in exchange for that number of full and fractional shares of Municipal
Bonds having an aggregate net asset value equal to the aggregate net asset value
of each Tax Free shareholder's shares held in Tax Free as of the close of
business on the business day preceding the date of the Closing. Municipal Bonds
will assume all of the liabilities of Tax Free. In connection with the Closing,
Tax Free will distribute the shares of beneficial interest of Municipal Bonds
received in the exchange to the shareholders of Tax Free in complete liquidation
of Tax Free. Tax Free will be abolished as a series of the State Trust.
16
<PAGE>
Upon completion of the Reorganization, each shareholder of Tax Free will
own that number of full and fractional shares of Municipal Bonds having an
aggregate net asset value equal to the aggregate net asset value of such
shareholder's shares held in Tax Free immediately as of the close of business on
the business day preceding the Closing. Each Tax Free shareholder's account with
the Municipal Trust as a Municipal Bonds shareholder will be identical in all
material respects to the accounts currently maintained by the State Trust for
such shareholder, except as noted above. In the interest of economy and
convenience, shares of Tax Free generally are not represented by physical
certificates, and shares of Municipal Bonds issued to Tax Free shareholders
similarly will be in uncertificated form.
Until the Closing, shareholders of Tax Free will, of course, continue to be
able to redeem their shares at the net asset value next determined after receipt
by Tax Free's Transfer Agent of a redemption request in proper form. Redemption
requests received by the Transfer Agent thereafter will be treated as requests
received for the redemption of shares of Managed Bonds received by the
shareholder in connection with the Reorganization.
The obligations of the State Trust and the Municipal Trust on behalf of
each of Tax Free and Municipal Bonds, respectively, under the Plan are subject
to various conditions, as stated therein. Among other things, the Plan requires
that all filings be made with, and all authority be received from, the SEC and
state securities commissions as may be necessary in the opinion of counsel to
permit the parties to carry out the transactions contemplated by the Plan. Tax
Free and Municipal Bonds are in the process of making the necessary filings. To
provide against unforeseen events, the Plan may be terminated or amended at any
time prior to the Closing by action of the Trustees of either Trust,
notwithstanding the approval of the Plan by the shareholders of Tax Free.
However, no amendment may be made that materially adversely affects the
interests of the shareholders of Tax Free without obtaining the approval of Tax
Free shareholders. Tax Free and Municipal Bonds may at any time waive compliance
with certain of the covenants and conditions contained in the Plan. For a
complete description of the terms and conditions of the Reorganization, see the
Plan at Exhibit A.
Scudder Kemper will assume and pay all of the expenses that are solely and
directly related to the Reorganization, within the meaning of Revenue Ruling
73-54, which expenses are estimated to be approximately $[INSERT]. Accordingly,
Tax Free will not bear any expenses relating to the Reorganization. [Tax Free
shareholders will pay their own expenses, if any, incurred in connection with
the reorganization.] Shareholders have no rights of appraisal.
REASONS FOR THE PROPOSED TRANSACTION
At a meeting of Tax Free's Audit Committee held on April 13, 1999, the
Non-Interested Trustees of Tax Free were presented with a memorandum discussing
in general terms the benefits which would accrue to the shareholders of Tax Free
if the Fund were to reorganize with and into Municipal Bonds. The Non-Interested
Trustees of Tax Free then requested to have the matter presented to the full
board by representatives of Scudder Kemper at the May 3, 1999 board meeting. The
proposed Reorganization was presented to the Board of Trustees of each Trust for
consideration and approval at a meeting on May 3, 1999. All of the Trustees were
present at each meeting. For the reasons discussed below, the Board of Trustees
of the State Trust, including all
17
<PAGE>
of the Non-Interested Trustees, has determined that the interests of the
shareholders of Tax Free will not be diluted as a result of the proposed
Reorganization, and that the proposed Reorganization is in the best interests of
Tax Free and its shareholders.
The proposed combination of Tax Free and Municipal Bonds will allow the
shareholders of Tax Free to participate in a professionally-managed portfolio
consisting primarily of high quality bonds and to earn a high level of return
consistent with a high degree of principal stability. The Trustees of State
Trust believe that, notwithstanding the loss of tax-free income at the
Pennsylvania state level, Tax Free shareholders will benefit from the proposed
Reorganization because Municipal Bonds, while guided by similar investment
objectives and policies, offers the following benefits:
OPPORTUNITY FOR HIGHER ANNUAL INCOME AND RETURN. It is anticipated that
Municipal Bonds would normally achieve a higher level of income and return over
a year's time than Tax Free notwithstanding the fact that income generated by
Tax Free is currently exempt from Pennsylvania state tax. This would occur for
various reasons. First, Municipal Bonds has the flexibility to invest in a more
diversified portfolio of municipal securities than Tax Free in pursuit of its
investment objective, which may generate higher income. Second, as discussed in
detail below, the management fees and total operating expenses of Municipal
Bonds (assuming the termination of waivers and reimbursements by Scudder Kemper
on behalf of Tax Free on July 31, 1999) are projected to be lower than the
corresponding fees and expenses to be incurred by Tax Free. Lastly, due to
changes in Pennsylvania tax laws, the income advantage of Tax Free has declined.
Municipal Bonds has produced better total returns than Tax Free Fund over
the past one-, three-, and five-year periods ended March 31, 1999. During each
of these periods, Municipal Bonds has ranked in the top third of its Lipper
Category, while Tax Free has ranked in the third quartile for the one-year
period and the second quartile for the three- and five-year periods in its
Lipper Category. Also, the level of income paid to shareholders in each Fund is
very comparable. As of March 31, 1999, the 30-day SEC yield of Tax Free was
[INSERT%], compared to [INSERT%] for Municipal Bonds. For Pennsylvania investors
in the 36% tax bracket, there is only a slight advantage in owning Tax Free, as
the after tax yield is [INSERT%], versus Municipal Bonds' after tax yield of
[INSERT%]. Without the expense subsidization by Scudder Kemper of Tax Free,
however, Municipal Bonds would have a significant yield advantage on both a
pre-tax and after-tax basis.
LOWER FEES AND EXPENSES. If the proposed transaction is approved, Tax Free
shareholders may benefit from both lower advisory fees and lower total fund
expenses. Please refer to "Investment Management Fees and Expenses" set forth
above.
Tax Free has higher gross operating expenses due to its relatively small
level of assets. As of March 31, 1999, the Fund had gross annual operating
expenses of [0.92%], with a 0.75% cap in place until July 31, 1999. As of
December 31, 1998, Municipal Bonds had gross annual operating expenses of 0.62%.
As a result of the Reorganization, Tax Free shareholders will be investing in a
Fund with expenses that are currently 0.13% lower. Without the Tax Free expense
subsidization, Municipal Bonds' expenses would be 0.30% lower. If the
Reorganization is
18
<PAGE>
approved by Tax Free shareholders, Municipal Bonds' net expense ratio is
estimated to remain unchanged for the year ending December 31, 1999.
Some of the fixed expenses currently paid by Municipal Bonds, such as
accounting, legal and printing costs, would be spread over a larger asset base.
Other things being equal, shareholders benefit from economies of scale through
lower expense ratios and higher net income distributions.
Due to a combination of factors, including the small size of Tax Free, the
decline in the Pennsylvania state income tax, past and prospective sales of Tax
Free and current market conditions, the Trustees and management of the State
Trust believe Tax Free and its shareholders would benefit from a tax-free
reorganization with a larger fund with similar investment objectives and
policies. Accordingly, it is recommended that the Tax Free shareholders approve
the Reorganization with Municipal Bonds.
The Board of Trustees of the State Trust, in recommending the proposed
transaction, considered a number of factors, including the following:
(1) the positive compatibility of Municipal Bonds' investment objectives,
policies and restrictions with those of Tax Free;
(2) the completely tax-free nature of the Reorganization;
(3) the current and potentially higher income levels, higher annual return
and lower expense ratio of Municipal Bonds, notwithstanding the fact
that income generated by Municipal Bonds, unlike Tax Free, is subject
to state taxes;
(4) the terms and conditions of the Reorganization and that it should not
result in a dilution of Tax Free shareholder interests;
(5) the absence of costs and expenses to Tax Free of the proposed
Reorganization; and
(6) the continuing capabilities and resources of the Investment Manager
and its affiliates in the areas of marketing, investment management,
administration and shareholder service which will be available to
Municipal Bonds.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
Municipal Bonds is a series of the Municipal Trust, a Massachusetts
business trust established under a Declaration of Trust, dated September 24,
1976, as amended. The Municipal Trust's authorized capital consists of an
unlimited number of shares of beneficial interest, par value $0.01 per share.
The Trustees are authorized to divide the shares into separate series. Tax Free
is a series of the State Trust. Each share of each series represents an interest
in that series that is equal to and proportionate with each other share of that
series. Shareholders are entitled to one vote per share (and a proportionate
fractional vote per each fractional share) held on matters on which they are
entitled to vote. Each Trust is not required to hold shareholder
19
<PAGE>
meetings annually, although shareholder meetings may be called for purposes such
as electing or removing Trustees, changing fundamental policies or approving an
investment management contract. In the event that shareholders of a Trust wish
to communicate with other shareholders concerning the removal of any Trustee,
such shareholders shall be assisted in communicating with other shareholders for
the purpose of obtaining signatures to request a meeting of shareholders, all in
the manner provided in Section 16(c) of the 1940 Act as if Section 16(c) were
applicable.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is conditioned upon the receipt by the State Trust and
the Municipal Trust, on behalf of Tax Free and Municipal Bonds, respectively, of
an opinion from Willkie Farr & Gallagher, substantially to the effect that,
based upon certain facts, assumptions and representations of the parties, for
federal income tax purposes: (i) the transfer to Municipal Bonds of all or
substantially all of the assets of Tax Free in exchange solely for Shares and
the assumption by Municipal Bonds of all of the liabilities of Tax Free,
followed by the distribution of such Shares to Tax Free shareholders in exchange
for their shares of Tax Free in complete liquidation of Tax Free, will
constitute a "reorganization" within the meaning of Section [368(a)(1)] of the
Code, and Municipal Bonds and Tax Free will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code; (ii) no gain
or loss will be recognized by Tax Free upon the transfer of all or substantially
all of its assets to Municipal Bonds in exchange solely for Shares and the
assumption by Municipal Bonds of all of the liabilities of Tax Free; (iii) the
basis of the assets of Tax Free in the hands of Municipal Bonds will be the same
as the basis of such assets of Tax Free immediately prior to the transfer; (iv)
the holding period of the assets of Tax Free in the hands of Municipal Bonds
will include the period during which such assets were held by Tax Free; (v) no
gain or loss will be recognized by Municipal Bonds upon the receipt of the
assets of Tax Free in exchange for Shares and the assumption by Municipal Bonds
of all of the liabilities of Tax Free; (vi) no gain or loss will be recognized
by the shareholders of Tax Free upon the receipt of Shares solely in exchange
for their shares of Tax Free as part of the transaction; (vii) the basis of
Shares received by the shareholders of Tax Free will be the same as the basis of
the shares of Tax Free exchanged therefor; and (viii) the holding period of
Shares received by the shareholders of Tax Free will include the holding period
during which the shares of Tax Free exchanged therefor were held, provided that
at the time of the exchange the shares of Tax Free were held as capital assets
in the hands of the shareholders of Tax Free.
While neither Trust is aware of any adverse state or local tax consequences
of the proposed Reorganization, it has not requested any ruling or opinion with
respect to such consequences and shareholders may wish to consult their own tax
adviser with respect to such matters.
LIQUIDATION AND ABOLITION OF SERIES
If the Reorganization is effected, Tax Free will be liquidated and
abolished as a series of the State Trust.
20
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate for Municipal Bonds (i.e., the ratio of the
lesser of annual sales or purchases to the monthly average value of the
portfolio) (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less), for the year
ended December 31, 1998 was 8.6%. The portfolio turnover rate for Tax Free for
the year ended March 31, 1999 was 21.4%.
CAPITALIZATION AND PERFORMANCE
The following table shows on an unaudited basis the capitalization of Tax
Free and Municipal Bonds as of December 31, 1998, and, on a pro forma basis, as
of that date giving effect to the Reorganization:
<TABLE>
<CAPTION>
PRO FORMA
TAX FREE MUNICIPAL BONDS COMBINED
-------- --------------- --------
<S> <C> <C> <C>
Net Assets $ [79,000,000] $ [737,000,000] $ [INSERT]
Net Asset Value Per Share
[$13.27] [$9.13] $ [INSERT]
Shares Outstanding [INSERT] [INSERT] [INSERT]
</TABLE>
Total return is a measure of the change in value of an investment in a fund
over the period covered, which assumes that any dividends or capital gains
distributions are automatically reinvested in shares of the fund rather than
paid to the investor in cash. The formula for total return used by a fund is
prescribed by the SEC and includes three steps: (1) adding to the total number
of shares of the fund that would be purchased by a hypothetical $1,000
investment in the fund all additional shares that would have been purchased if
all dividends and distributions paid or distributed during the period had been
automatically reinvested; (2) calculating the redeemable value of the
hypothetical initial investment as of the end of the period by multiplying the
total number of shares owned at the end of the period by the net asset value per
share on the last trading day of the period; and (3) dividing this account value
for the hypothetical investor by the amount of the initial investment, and
annualizing the result for periods of less than one year. Total return may be
stated with or without giving effect to any expense limitations in effect for a
fund.
The following table reflects the average annual total return for the 1, 5
and 10 year periods ending March 31, 1999 for Tax Free and December 31, 1998 for
Municipal Bonds, and the 30-day effective yield as of March 31, 1999:
21
<PAGE>
<TABLE>
<CAPTION>
TAX FREE(1) MUNICIPAL BONDS
----------- ---------------
<S> <C> <C>
Average Annual Total Return:
1-year...................... INSERT% INSERT%
5-year...................... INSERT% INSERT%
10-year..................... INSERT% INSERT%
30-day Yield................... INSERT% INSERT%
- ------------------
(1) If Scudder Kemper had not temporarily waived fees and reimbursed expenses,
the cumulative total return of Tax Free for the one year, five year and ten
year periods would have been lower.
</TABLE>
INVESTMENT MANAGER
Scudder Kemper is the investment manager for Municipal Bonds pursuant to an
Investment Management Agreement with the Municipal Trust, on behalf of Municipal
Bonds, substantially similar in all material respects to that currently in place
with the State Trust, on behalf of Tax Free, except for the management fee rates
payable thereunder.
ADDITIONAL INFORMATION ABOUT MUNICIPAL BONDS
AND TAX FREE
As noted above, additional information about the Funds, the State Trust,
the Municipal Trust and the Reorganization has been filed with the SEC and may
be obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103, or by calling (800) 225-2470.
Each Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith,
files reports, proxy material and other information about the applicable Fund
with the Securities and Exchange Commission.
Such reports, proxy material and other information can be inspected and
copied at the Public Reference Room maintained by the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
material can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
INTERESTS OF CERTAIN PERSONS
The Investment Manager has a financial interest in the Reorganization,
arising from the fact that its management fee under its Investment Management
Agreement with Municipal Bonds will increase as the amount of Municipal Bond's
assets increases: the amount of those assets will increase by virtue of the
Reorganization. See "Synopsis -- Fees and Expenses." SIS, SSC, SFAC and STC is
each a subsidiary or affiliate of the Investment Manager and a service provider
to
22
<PAGE>
Municipal Bonds as well as Tax Free. The fees paid by Municipal Bonds to SIS,
SSC, SFAC and STC will increase from the addition to Municipal Bonds of new
accounts and assets.
THE BOARD MEMBERS OF THE TRUST RECOMMEND THAT
THE SHAREHOLDERS OF THE FUND VOTE IN FAVOR OF THIS PROPOSAL.
ADDITIONAL INFORMATION
GENERAL
The cost of preparing, printing and mailing the enclosed proxy card(s) and
Proxy Statement/Prospectus and all other costs incurred in connection with the
solicitation of proxies, including any additional solicitation made by letter,
telephone or telegraph, will be paid by Scudder Kemper [or its affiliates]. In
addition to solicitation by mail, certain officers and representatives of the
State Trust, officers and employees of Scudder Kemper and certain financial
services firms and their representatives, who will receive no extra compensation
for their services, may solicit proxies by telephone, telegram or personally.
To participate in the Special Meeting, the shareholder may submit the proxy
card originally sent with the Proxy Statement/Prospectus or attend in person.
Any proxy given by a shareholder, whether in writing or by telephone, is
revocable until voted at the Special Meeting.
PROPOSALS OF SHAREHOLDERS
Shareholders wishing to submit proposals for inclusion in a proxy statement
for a shareholder meeting subsequent to the Special Meeting, if any, should send
their written proposals to the Secretary of the State Trust, c/o Scudder Kemper
Investments, Inc., Two International Place, Boston, Massachusetts 02110, within
a reasonable time before the solicitation of proxies for such meeting. The
timely submission of a proposal does not guarantee its inclusion.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
No Board member is aware of any matters that will be presented for action
at the Special Meeting other than the matters set forth herein. Should any other
matters requiring a vote of shareholders arise, the proxy in the accompanying
form will confer upon the person or persons entitled to vote the shares
represented by such proxy the discretionary authority to vote the shares as to
any such other matters in accordance with their best judgment in the interest of
the State Trust and/or Tax Free.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) PROMPTLY. NO POSTAGE
IS REQUIRED IF MAILED IN THE UNITED STATES.
By order of the Boards of Trustees,
/s/ John Millette
John Millette
Secretary
23
<PAGE>
INDEX OF EXHIBITS AND APPENDICES
Exhibit A: Form of Agreement and Plan of Reorganization
Appendix 1 Fund Shares Owned by Trustees
[Appendix 2 Trustees and Officers Associated with Scudder Kemper]
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this __th day of _________, 1999, between and among Scudder Municipal Trust (the
"Municipal Trust") and Scudder State Tax Free Trust (the "State Trust"), each a
Massachusetts business trust with its principal place of business at Two
International Place, Boston, MA 02110-4103, on behalf of Scudder Managed
Municipal Bonds (the "Acquiring Fund"), a separate series of the Municipal
Trust, and Scudder Pennsylvania Tax Free Fund (the "Acquired Fund"), a separate
series of the State Trust, and solely for purposes of section 10 hereof, Scudder
Kemper Investments, Inc., a Delaware corporation located at Two International
Place, Boston, MA 02110-4103 ("Scudder Kemper").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section [368(a)] of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization (the "Reorganization")
will consist of the transfer of all or substantially all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for voting shares of
beneficial interest ($.01 par value per share) of the Acquiring Fund (the
"Acquiring Fund Shares"), the assumption by the Acquiring Fund of all of the
liabilities of the Acquired Fund and the distribution of the Acquiring Fund
Shares to the shareholders of the Acquired Fund in complete liquidation of the
Acquired Fund as provided herein, all upon the terms and conditions hereinafter
set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Acquired Fund agrees
to transfer to the Acquiring Fund all or substantially all of the Acquired
Fund's assets as set forth in section 1.2, and the Acquiring Fund agrees in
exchange therefor (i) to deliver to the Acquired Fund that number of full and
fractional Acquiring Fund Shares determined by dividing the value of the
Acquired Fund's assets, computed in the manner and as of the time and date set
forth in section 2.1, by the net asset value of one Acquiring Fund Share,
computed in the manner and as of the time and date set forth in section 2.2; and
(ii) to assume all of the liabilities of the Acquired Fund, as set forth in
section 1.3. Such transactions shall take place at the closing provided for in
section 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by the Acquiring Fund
(collectively "Assets") shall consist of all assets, including, without
limitation, all cash, cash equivalents, securities, commodities and futures
interests and dividends or interest or other
A-1
<PAGE>
receivables that are owned by the Acquired Fund and any deferred or prepaid
expenses shown on the unaudited statement of assets and liabilities of the
Acquired Fund prepared as of the effective time of the closing (the "Effective
Time Statement"), prepared in accordance with generally accepted accounting
principles ("GAAP") applied consistently with those of the Acquired Fund's most
recent audited balance sheet. The assets shall constitute at least 90% of the
fair market value of the net assets, and at least 70% of the fair market value
of the gross assets, held by Acquired Fund immediately before the Closing
(excluding for these purposes assets used to pay the dividends and other
distributions paid pursuant to section 1.4).
1.3. [The Acquired Fund will endeavor to discharge all the Acquired Fund's
known liabilities and obligations prior to the Closing Date as defined in
section 3.1, other than those liabilities and obligations which would otherwise
be discharged at a later date in the ordinary course of business.]
1.4. On or as soon as practicable prior to the Closing Date as defined in
section 3.1, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
1.5. Immediately after the transfer of assets provided for in section 1.1
(the "Liquidation Time"), the Acquired Fund will distribute to the Acquired
Fund's shareholders of record, determined as of the Valuation Time (the
"Acquired Fund Shareholders"), on a pro rata basis, the Acquiring Fund Shares
received by the Acquired Fund pursuant to section 1.1 and will completely
liquidate. Such distribution and liquidation will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund Shareholders.
The aggregate net asset value of Acquiring Fund Shares to be so credited to
Acquired Fund Shareholders shall be equal to the aggregate net asset value of
the Acquired Fund shares owned by such shareholders as of the Valuation Time.
All issued and outstanding shares of the Acquired Fund will simultaneously be
cancelled on the books of the Acquired Fund, although share certificates
representing interests in shares of the Acquired Fund will represent a number of
Acquiring Fund Shares after the Closing Date as determined in accordance with
section 2.3. The Acquiring Fund will not issue certificates representing
Acquiring Fund Shares in connection with such exchange.
1.6. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's then-current prospectus and statement of
additional information.
1.7. Any reporting responsibility of the Acquired Fund including, without
limitation, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
A-2
<PAGE>
1.8. All books and records of the Acquired Fund, including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder, shall be available to the Acquiring Fund from and after
the Closing Date and shall be turned over to the Acquiring Fund as soon as
practicable following the closing date.
2. VALUATION
2.1. The value of the Assets shall be computed as of the close of regular
trading on the New York Stock Exchange on the business day immediately preceding
the Closing Date, as defined in Section 3.1 (such time and date being
hereinafter called the "Valuation Time") after the declaration and payment of
any dividends and/or other distributions on that date, using the valuation
procedures set forth in the Acquiring Fund's Declaration of Trust, as amended,
and then-current prospectus or statement of additional information.
2.2. The net asset value of an Acquiring Fund share shall be the net asset
value per share computed as of the Valuation Time using the valuation procedures
referred to in section 2.1.
2.3. The number of the Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Assets shall be determined by
dividing the value of the Assets with respect to shares of the Acquired Fund
determined in accordance with section 2.1 by the net asset value of an Acquiring
Fund Share determined in accordance with section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act and
shall be subject to confirmation by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1. The Closing of the transactions contemplated by this Agreement shall
be September 20, 1999, or such later date as the parties may agree in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously as of 4:00 P.M., Eastern time, on the Closing Date,
unless otherwise agreed to by the parties. The Closing shall be held at the
offices of [Scudder Kemper] or at such other place and time as the parties may
agree.
3.2. Acquired Fund shall deliver to Acquiring Fund on the Closing Date a
schedule of assets.
3.3. State Street Bank and Trust Company, as custodian for the Acquired
Fund, shall (a) deliver at the Closing a certificate of an authorized officer
stating that the Assets shall have been delivered in proper form to State Street
Bank and Trust Company, custodian for the Acquiring Fund, prior to or on the
Closing Date and (b) all necessary taxes in connection with the delivery of the
Assets, including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made. Acquired Fund's
portfolio securities represented by a certificate or other written instrument
shall be presented by Custodian for
A-3
<PAGE>
Acquired Fund to Custodian for Acquiring Fund for examination no later than five
business days preceding the Closing Date and transferred and delivered by the
Acquired Fund as of the Closing Date by the Acquired Fund for the account of
Acquiring Fund duly endorsed in proper form for transfer in such condition as to
constitute good delivery thereof. Acquired Fund's portfolio securities and
instruments deposited with a securities depository, as defined in Rule 17f-4
under the 1940 Act, shall be delivered as of the Closing Date by book entry in
accordance with the customary practices of such depositories and Custodian for
Acquiring Fund. The cash to be transferred by the Acquired Fund shall be
delivered by wire transfer of federal funds on the Closing Date.
3.4. The Transfer Agent, on behalf of the Acquired Fund, shall deliver at
the Closing a certificate of an authorized officer stating that its records
contain the names and addresses of the Acquired Fund Shareholders and the number
and percentage ownership (to three decimal places) of outstanding Acquired Fund
Shares owned by each such shareholder immediately prior to the Closing. The
Acquiring Fund shall issue and deliver a confirmation evidencing the Acquiring
Fund Shares to be credited on the Closing Date to the Acquired Fund or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have
been credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts or other documents as
such other party or its counsel may reasonably request to effect the
transactions contemplated by this Agreement.
3.5. In the event that immediately prior to the Valuation Time (a) the New
York Stock Exchange or another primary trading market for portfolio securities
of the Acquiring Fund or the Acquired Fund shall be closed to trading or trading
thereupon shall be restricted, or (b) trading or the reporting of trading on
such Exchange or elsewhere shall be disrupted so that, in the judgment of the
Board of Trustees of either Trust, accurate appraisal of the value of the net
assets with respect to the Acquiring Fund Shares or the Acquired Fund Shares is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1. The State Trust, on behalf of the Acquired Fund, represents and
warrants to the Acquiring Fund as follows:
(a) The State Trust is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts with power
under the Trust's Declaration of Trust, as amended, to own all of its
properties and assets and to carry on its business as it is now being
conducted;
(b) The State Trust is registered with the Commission as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and such registration is in full force and
effect;
A-4
<PAGE>
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated herein, except such as have been
obtained under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the 1940
Act and such as may be required by state securities laws;
(d) Other than with respect to contracts entered into in connection
with the portfolio management of the Acquired Fund which shall terminate on
or prior to the Closing Date, the State Trust is not, and the execution,
delivery and performance of this Agreement by the Trust will not result, in
violation of Massachusetts law or of the Trust's Declaration of Trust, as
amended, or By-Laws, or of any material agreement, indenture, instrument,
contract, lease or other undertaking known to counsel to which the Acquired
Fund is a party or by which it is bound, and the execution, delivery and
performance of this Agreement by the Acquired Fund will not result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or decree to
which the Acquired Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquired Fund or any
properties or assets held by it. The Acquired Fund knows of no facts which
might form the basis for the institution of such proceedings which would
materially and adversely affect its business and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, including the Investment
Portfolio, Operations, and Changes in Net Assets, and the Financial
Highlights of the Acquired Fund at and for the year ended March 31, 1999,
has been audited by PricewaterhouseCoopers LLP, independent certified
public accountants, and are in accordance with GAAP consistently applied,
and such statements (copies of which have been furnished to the Acquiring
Fund) present fairly, in all material respects, the financial position,
results of operations, changes in net assets and financial highlights of
the Acquired Fund as of such date in accordance with GAAP, and there are no
known contingent liabilities of the Acquired Fund required to be reflected
on a statement of assets and liabilities (including the notes thereto) in
accordance with GAAP as of such date not disclosed therein;
(g) Since March 31, 1999, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquired Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred except as otherwise
disclosed to and accepted in writing by the Acquiring Fund. For purposes of
this subsection (g), a decline in net asset value per share of the Acquired
Fund due to declines in market values of securities in the Acquired Fund's
portfolio, the
A-5
<PAGE>
discharge of Acquired Fund liabilities, or the redemption of Acquired Fund
shares by Acquired Fund Shareholders shall not constitute a material
adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquired Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other
taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the
payment thereof, and, to the best of the Acquired Fund's knowledge, no such
return is currently under audit and no assessment has been asserted with
respect to such returns;
(i) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment
company and has elected to be treated as such, has been eligible to and has
computed its federal income tax under Section 852 of the Code, and will
have distributed all of its investment company taxable income and net
capital gain (as defined in the Code) that has accrued through the Closing
Date;
(j) All issued and outstanding shares of the Acquired Fund (i) have
been offered and sold in every state and the District of Columbia in
compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws, (ii) are, and on
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable (recognizing that, under Massachusetts law,
Acquired Fund Shareholders, under certain circumstances, could be held
personally liable for obligations of the Acquired Fund), and (iii) will be
held at the time of the Closing by the persons and in the amounts set forth
in the records of the Transfer Agent, as provided in section 3.3. The
Acquired Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of the Acquired Fund shares, nor is
there outstanding any security convertible into any of the Acquired Fund
shares;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the Acquired Fund's assets to be transferred to the
Acquiring Fund pursuant to section 1.2 and full right, power, and authority
to sell, assign, transfer and deliver such assets hereunder free of any
liens or other encumbrances, except those liens or encumbrances as to which
the Acquiring Fund has received notice at or prior to the Closing, and upon
delivery and payment for such assets, the Acquiring Fund will acquire good
and marketable title thereto, subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the 1933
Act [and the 1940 Act], except those restrictions as to which the Acquiring
Fund has received notice and necessary documentation at or prior to the
Closing;
(l) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action
on the part of the Trustees of the State Trust, and, subject to the
approval of the Acquired Fund Shareholders, this Agreement constitutes a
valid and binding obligation of the State Trust, on behalf of the Acquired
Fund, enforceable in accordance with its terms, subject, as to
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enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the National Association of
Securities Dealers, Inc.), which may be necessary in connection with the
transactions contemplated hereby, shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto; and
(n) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading; and
(o) The proxy statement of the Acquired Fund to be included in the
Registration Statement referred to in section 5.7 (the "Proxy Statement"),
insofar as it relates to the Acquired Fund, will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements are made, not materially
misleading; provided, however, that the representations and warranties in
this section shall not apply to statements in or omissions from the Proxy
Statement and the Registration Statement made in reliance upon and in
conformity with information that was furnished or should have been
furnished by the Acquiring Fund for use therein.
4.2. The Municipal Trust, on behalf of the Acquiring Fund, represents and
warrants to the Acquired Fund as follows:
(a) The Municipal Trust is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts with power
under the Trust's Declaration of Trust, as amended, to own all of its
properties and assets and to carry on its business as it is now being
conducted;
(b) The Municipal Trust is registered with the Commission as an
open-end management investment company under the 1940 Act, and such
registration is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required by state securities laws;
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(d) The Municipal Trust is not, and the execution, delivery and
performance of this Agreement by the Trust will not result, in violation of
Massachusetts law or of the Trust's Declaration of Trust, as amended, or
By-Laws, or of any material agreement, indenture, instrument, contract,
lease or other undertaking known to counsel to which the Acquiring Fund is
a party or by which it is bound, and the execution, delivery and
performance of this Agreement by the Acquiring Fund will not result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or decree to
which the Acquiring Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any
properties or assets held by it. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings which would
materially and adversely affect its business and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, including the Investment
Portfolio, Operations, and Changes in Net Assets, and the Financial
Highlights of the Acquiring Fund at and for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, independent certified
public accountants, and are in accordance with GAAP consistently applied,
and such statements (copies of which have been furnished to the Acquired
Fund) present fairly, in all material respects, the financial position,
results of operations, changes in net assets and financial highlights of
the Acquiring Fund as of such date in accordance with GAAP, and there are
no known contingent liabilities of the Acquiring Fund required to be
reflected on a statement of assets and liabilities (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(g) Since December 31, 1998, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquiring Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred except as otherwise
disclosed to and accepted in writing by the Acquired Fund. For purposes of
this subsection (g), a decline in net asset value per share of the
Acquiring Fund due to declines in market values of securities in the
Acquiring Fund's portfolio, the discharge of Acquiring Fund liabilities, or
the redemption of Acquiring Fund shares by Acquiring Fund shareholders
shall not constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquiring Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other
taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the
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payment thereof, and, to the best of the Acquiring Fund's knowledge, no
such return is currently under audit and no assessment has been asserted
with respect to such returns;
(i) For each taxable year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such, has
been eligible to and has computed its federal income tax under Section 852
of the Code, and will do so for the taxable year including the Closing
Date;
(j) All issued and outstanding shares of the Acquiring Fund (i) have
been offered and sold in every state and the District of Columbia in
compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws and (ii) are, and on
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable (recognizing that, under Massachusetts law,
Acquiring Fund Shareholders, under certain circumstances, could be held
personally liable for the obligations of the Acquired Fund). The Acquiring
Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquiring Fund shares, nor is there
outstanding any security convertible into any of the Acquiring Fund shares;
(k) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant
to the terms of this Agreement, will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly
issued and outstanding Acquiring Fund Shares, and will be fully paid and
non-assessable (recognizing that, under Massachusetts law, Acquiring Fund
Shareholders, under certain circumstances, could be held personally liable
for the obligations of the Acquired Fund);
(l) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens or other
encumbrances, except those liens or encumbrances as to which the Acquired
Fund has received notice at or prior to the Closing;
(m) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action
on the part of the Trustees of the Municipal Trust and this Agreement will
constitute a valid and binding obligation of the Municipal Trust, on behalf
of the Acquiring Fund, enforceable in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(n) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the National Association of
Securities Dealers, Inc.), which may be necessary in connection with the
transactions contemplated hereby, shall be accurate and complete in
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all material respects and shall comply in all material respects with
federal securities and other laws and regulations applicable thereto;
(o) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading;
(p) The Proxy Statement to be included in the Registration Statement,
only insofar as it relates to the Acquiring Fund, will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading; provided, however, that the representations and
warranties in this section shall not apply to statements in or omissions
from the Proxy Statement and the Registration Statement made in reliance
upon and in conformity with information that was furnished or should have
been furnished by the Acquired Fund for use therein; and
(q) The Acquiring Fund agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state securities laws as may be necessary in order to continue
its operations after the Closing Date.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1. The Acquiring Fund and the Acquired Fund each covenants to operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that (a) such ordinary course of business will include (i) the
declaration and payment of customary dividends and other distributions and (ii)
such changes as are contemplated by the Funds' normal operations; and (b) each
Fund shall retain exclusive control of the composition of its portfolio until
the Closing Date.
5.2. Upon reasonable notice, the Acquiring Fund's officers and agents shall
have reasonable access to the Acquired Fund's books and records necessary to
maintain current knowledge of the Acquired Fund and to ensure that the
representations and warranties made by the Acquired Fund are accurate.
5.3. The Acquired Fund covenants to call a meeting of the Acquired Fund
Shareholders entitled to vote thereon to consider and act upon this Agreement
and to take all other reasonable action necessary to obtain approval of the
transactions contemplated herein. Such meeting shall be scheduled for no later
than [September 20, 1999].
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5.4. The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.
5.5. The Acquired Fund covenants that it will assist the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Acquired Fund Shares and will provide the
Acquiring Fund with a list of affiliates of the Acquired Fund.
5.6. Subject to the provisions of this Agreement, the Acquiring Fund and
the Acquired Fund will each take, or cause to be taken, all actions, and do or
cause to be done, all things reasonably necessary, proper, and/or advisable to
consummate and make effective the transactions contemplated by this Agreement.
5.7. Each Fund covenants to prepare the Registration Statement on Form N-14
(the "Registration Statement"), in compliance with the 1933 Act, the 1934 Act
and the 1940 Act in connection with the meeting of the Acquired Fund
Shareholders to consider approval of this Agreement and the transactions
contemplated herein. The Acquiring Fund will file the Registration Statement,
including the Proxy Statement, with the Commission. The Acquired Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the Proxy Statement referred to
in section 4.1(o), all to be included in the Registration Statement, in
compliance in all material respects with the 1933 Act, the 1934 Act and the 1940
Act.
5.8. The Acquired Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquiring Fund, execute and deliver or cause to
be executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action as the Acquiring Fund may
reasonably deem necessary or desirable in order to vest in and confirm the
Acquiring Fund's title to and possession of all the assets and otherwise to
carry out the intent and purpose of this Agreement.
5.9. The Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act and 1940 Act, and such
of the state securities laws as it deems appropriate in order to continue its
operations after the Closing Date and to consummate the transactions
contemplated herein; provided, however, that the Acquiring Fund may take such
actions it reasonably deems advisable after the Closing Date as circumstances
change.
5.10. The Acquiring Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquired Fund, execute and deliver or cause to
be executed and delivered all such assignments, assumption agreements, releases,
and other instruments, and will take or cause to be taken such further action,
as the Acquired Fund may reasonably deem necessary or desirable in order to (i)
vest and confirm to the Acquired Fund title to and possession of all Acquiring
Fund shares to be transferred to Acquired Fund pursuant to this Agreement and
(ii) assume the assumed liabilities from the Acquired Fund.
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5.11. As soon as reasonably practicable after the Closing, the Acquired
Fund shall make a liquidating distribution to its shareholders consisting of the
Acquiring Fund Shares received at the Closing.
5.12. The Acquiring Fund and the Acquired Fund shall each use its
reasonable best efforts to fulfill or obtain the fulfillment of the conditions
precedent to effect the transactions contemplated by this Agreement as promptly
as practicable.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1. All representations and warranties of the Municipal Trust, with
respect to the Acquiring Fund, contained in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as they may
be affected by the transactions contemplated by this Agreement, as of the
Closing Date, with the same force and effect as if made on and as of the Closing
Date; and there shall be (i) no pending or threatened litigation brought by any
person (other than Acquiring Fund, its adviser or any of their affiliates)
against the Acquired Fund, the Acquiring Fund or their advisers, trustees or
officers arising out of this Agreement and (ii) no facts known to the Acquired
Fund which the Acquired Fund reasonably believes might result in such
litigation.
6.2. The Acquiring Fund shall have delivered to the Acquired Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquired Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Municipal Trust, with respect to the Acquiring Fund, made in this Agreement
are true and correct on and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquired Fund shall reasonably request;
6.3. The Acquired Fund shall have received on the Closing Date an opinion
of Willkie Farr & Gallagher, in a form reasonably satisfactory to the Acquired
Fund, and dated as of the Closing Date, to the effect that:
(a) The Municipal Trust has been duly formed and is an existing
business trust;
(b) The Acquiring Fund has the power to carry on its business as
presently conducted in accordance with the description thereof in the
Municipal Trust's registration statement under the 1940 Act;
(c) the Agreement has been duly authorized, executed and delivered by
the Municipal Trust, on behalf of the Acquiring Fund, and constitutes a
valid and legally binding obligation of the Municipal Trust, on behalf of
the Acquiring Fund, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer,
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reorganization, moratorium and laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
(d) the execution and delivery of the Agreement did not, and the
exchange of the Acquired Fund's assets for Acquiring Fund Shares pursuant
to the Agreement will not, violate the Acquiring Fund's Declaration of
Trust, as amended, or By-laws; and
(e) to the knowledge of such counsel, all regulatory consents,
authorizations, approvals or filings required to be obtained or made by the
Acquiring Fund under the Federal laws of the United States or the laws of
The Commonwealth of Massachusetts for the exchange of the Acquired Fund's
assets for Acquiring Fund Shares, pursuant to the Agreement have been
obtained or made; and
Such opinion may state that it is solely for the benefit of the Acquired Fund,
its Trustees and its officers. Such counsel may rely as to matters governed by
the laws of The Commonwealth of Massachusetts on an opinion of Massachusetts
counsel and/or certificates of officers or Trustees of the Acquiring Fund. Such
opinion also shall include such other matters incident to the transaction
contemplated hereby, as the Acquired Fund may reasonably request.
6.4. The Acquiring Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquiring Fund on or before the Closing Date.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquired Fund of all of the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following further
conditions:
7.1. All representations and warranties of the State Trust, with respect to
the Acquired Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than Acquired Fund, its adviser or any of their affiliates) against the
Acquiring Fund, the Acquired Fund or their advisers, trustees or officers
arising out of this Agreement and (ii) no facts known to the Acquiring Fund
which the Acquiring Fund reasonably believes might result in such litigation.
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3. The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the State Trust with respect to the Acquired Fund made in this
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Agreement are true and correct on and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request;
7.4. The Acquiring Fund shall have received on the Closing Date an opinion
of Willkie Farr & Gallagher, in a form reasonably satisfactory to the Acquiring
Fund, and dated as of the Closing Date, to the effect that:
(a) The State Trust has been duly formed and is an existing business
trust;
(b) The Acquired Fund has the corporate power to carry on its business
as presently conducted in accordance with the description thereof in the
State Trust's registration statement under the 1940 Act;
(c) the Agreement has been duly authorized, executed and delivered by
the State Trust, on behalf of the Acquired Fund, and constitutes a valid
and legally binding obligation of the State Trust, on behalf of the
Acquired Fund, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
(d) the execution and delivery of the Agreement did not, and the
exchange of the Acquired Fund's assets for Acquiring Fund Shares pursuant
to the Agreement will not, violate the Acquired Fund's Declaration of
Trust, as amended, or By-laws; and
(e) to the knowledge of such counsel, all regulatory consents,
authorizations, approvals or filings required to be obtained or made by the
Acquired Fund under the Federal laws of the United States or the laws of
The Commonwealth of Massachusetts for the exchange of the Acquired Fund's
assets for Acquiring Fund Shares, pursuant to the Agreement have been
obtained or made; and
Such opinion may state that it is solely for the benefit of the Acquiring Fund,
its Trustees and its officers. Such counsel may rely as to matters governed by
the laws of The Commonwealth of Massachusetts on an opinion of Massachusetts
counsel and/or certificates of officers or Trustees of the Acquired Fund. Such
opinion also shall include such other matters incident to the transaction
contemplated hereby, as the Acquiring Fund may reasonably request.
7.5. The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquired Fund on or before the Closing Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not been met on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
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8.1. This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the State Trust's
Declaration of Trust, as amended, and By-Laws, applicable Massachusetts law and
the 1940 Act, and certified copies of the resolutions evidencing such approval
shall have been delivered to the Acquiring Fund. Notwithstanding anything herein
to the contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
conditions set forth in this section 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending or to its knowledge threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain material damages or
other relief in connection with, this Agreement or the transactions contemplated
herein;
8.3. All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5. The parties shall have received an opinion of Willkie Farr & Gallagher
addressed to each Trust substantially to the effect that, based upon certain
facts, assumptions and representations, for Federal income tax purposes: (i) the
transfer to Municipal Bonds of all or substantially all of the assets of Tax
Free in exchange solely for Shares and the assumption by Municipal Bonds of all
of the liabilities of Tax Free, followed by the distribution of such Shares to
Tax Free shareholders in exchange for their shares of Tax Free in complete
liquidation of Tax Free, will constitute a "reorganization" within the meaning
of Section [368(a)(1)] of the Code, and Municipal Bonds and Tax Free will each
be "a party to a reorganization" within the meaning of Section 368(b) of the
Code; (ii) no gain or loss will be recognized by Tax Free upon the transfer of
all or substantially all of its assets to Municipal Bonds in exchange solely for
Shares and the assumption by Municipal Bonds of all of the liabilities of Tax
Free; (iii) the basis of the assets of Tax Free in the hands of Municipal Bonds
will be the same as the basis of such assets of Tax Free immediately prior to
the transfer; (iv) the holding period of the assets of Tax Free in the hands of
Municipal Bonds will include the period during which such assets were held by
Tax Free; (v) no gain or loss will be recognized by Municipal Bonds upon the
receipt of the assets of Tax Free in exchange for Shares and the assumption by
Municipal Bonds of all of the liabilities of Tax Free; (vi) no gain or loss will
be recognized by the shareholders of Tax Free upon the receipt of Shares solely
in exchange for their shares of Tax Free as part of the transaction; (vii) the
basis of Shares received by the shareholders of Tax Free will be the same as the
basis of the shares of Tax Free exchanged therefor; and (viii) the holding
period of Shares received by the shareholders of Tax Free will include the
holding period during which the shares of Tax Free exchanged therefor
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were held, provided that at the time of the exchange the shares of Tax Free were
held as capital assets in the hands of the shareholders of Tax Free. The
delivery of such opinion is conditioned upon receipt by Willkie Farr & Gallagher
of representations it shall request of each Trust. Notwithstanding anything
herein to the contrary, neither the Acquiring Fund nor the Acquired Fund may
waive the condition set forth in this section 8.5.
9. INDEMNIFICATION
9.1. The Acquiring Fund agrees to indemnify and hold harmless the Acquired
Fund and each of the Acquired Fund's trustees and officers from and against any
and all losses, claims, damages, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally the Acquired Fund or any of its
trustees or officers may become subject, insofar as any such loss, claim damage
liability or expense (or actions with respect thereto) arises out of or is based
on any breach by the Acquiring Fund of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
9.2. The Acquired Fund agrees to indemnify and hold harmless the Acquiring
Fund and each of the Acquiring Fund's trustees and officers from and against any
and all losses, claims, damages, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally the Acquiring Fund or any of its
trustees or officers may become subject, insofar as any such loss, claim damage
liability or expense (or actions with respect thereto) arises out of or is based
on any breach by the Acquired Fund of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
10. FEES AND EXPENSES
10.1. The Municipal Trust, on behalf of the Acquiring Fund, and the State
Trust, on behalf of the Acquired Fund, represents and warrants to the other that
it has no obligations to pay any brokers or finders fees in connection with the
transactions provided for herein.
10.2. Expenses of the Reorganization that relate to the Acquiring Fund and
the Acquired Fund will be borne by Scudder Kemper, the investment adviser to the
Acquiring Fund and the Acquired Fund. Any such expenses which are so borne by
Scudder Kemper will be solely and directly related to the Reorganization within
the meaning of Revenue Ruling 73-54, 1973-1 C.B. 187.
11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
11.1. The Acquiring Fund and the Acquired Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
11.2. Except as specified in the next sentence set forth in this section
11.2, the representations, warranties and covenants contained in this Agreement
or in any document
A-16
<PAGE>
delivered pursuant hereto or in connection herewith shall not survive the
consummation of the transactions contemplated hereunder.
The covenants to be performed after the Closing and the obligations of each
of the Acquired Fund and Acquired Fund in Sections 9.1 and 9.2 shall survive the
Closing.
12. TERMINATION
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned by either party by (i) mutual agreement of the parties, or (ii)
by either party if the Closing shall not have occurred on or before [INSERT],
2000, unless such date is extended by mutual agreement of the parties, or (iii)
by either party if the other party shall have materially breached its
obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any party or their respective directors/trustees or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the Acquired Fund Shareholders called by the Acquired Fund pursuant
to section 5.3 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Acquired Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval.
14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered by hand (including by Federal Express or similar express courier)
or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
Acquired Fund, Two International Place, Boston, MA 02110-4103, with a copy to
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, N.Y. 10019-6099, Attn.:
Burton M. Leibert, Esq., or to the Acquiring Fund, Two International Place,
Boston, MA 02110-4103, with a copy to Willkie Farr & Gallagher, 787 Seventh
Avenue, New York, N.Y. 10019-6099, Attn.: Burton M. Leibert, Esq., or to any
other address that the Acquired Fund or the Acquiring Fund shall have last
designated by notice to the other party.
15. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
15.1. The Article and section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
A-17
<PAGE>
15.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
15.3. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and the shareholders of the
Acquiring Fund and the Acquired Fund and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
15.4. Each Trust is organized as a Massachusetts business trust, and
references in this Agreement to a Trust mean and refer to the applicable
Trustees from time to time serving under the respective Declarations of Trust on
file with the Secretary of State of The Commonwealth of Massachusetts, as the
same may be amended from time to time, pursuant to which each Trust conducts its
business. It is expressly agreed that the obligations of a Trust hereunder shall
not be binding upon any of its Trustees, shareholders, nominees, officers,
agents, or employees of either Trust, the Acquiring Fund or the Acquired Fund
personally, but bind only the respective property of the Acquiring Fund and the
Acquired Fund, as applicable, as provided in the applicable Trust's Declaration
of Trust. Moreover, no series of either Trust other than the Acquiring Fund and
the Acquired Fund, as applicable, shall be responsible for the obligations of
the Trust hereunder, and all persons shall look only to the respective assets of
each of the Acquiring Fund and the Acquired Fund to satisfy the obligations of
the applicable Trust hereunder. The execution and the delivery of this Agreement
have been authorized by each Trust's Board of Trustees, on behalf of each of the
Acquiring Fund and the Acquired Fund, as applicable, and this Agreement has been
signed by authorized officers of each of the Acquiring Fund and the Acquired
Fund acting as such, and neither such authorization by such Trustees, nor such
execution and delivery by such officers, shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
but shall bind only the respective property of the Acquiring Fund and the
Acquired Fund, as applicable, as provided in the applicable Trust's Declaration
of Trust.
15.5. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Massachusetts, without regard to its
principles of conflicts of laws.
A-18
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Attest: SCUDDER STATE TAX FREE TRUST
on behalf of Scudder Pennsylvania
Tax Free Fund
By: _____________________________
Its: ____________________________
Attest: SCUDDER MUNICIPAL TRUST
on behalf of Scudder Managed Municipal
Bonds
By: _____________________________
Its: ____________________________
Solely with respect to section 10 hereof:
Attest: SCUDDER KEMPER INVESTMENTS, INC.
By: _____________________________
Its: ____________________________
A-19
<PAGE>
<TABLE>
<CAPTION>
PROXY SCUDDER PENNSYLVANIA TAX FREE FUND PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
Special Meeting of Stockholders -- September 2, 1999
The undersigned hereby appoints [INSERT, INSERT and INSERT], each with the power of substitution, as proxies for the undersigned to
vote all shares of Scudder Pennsylvania Tax Free Fund (the "Fund"), a series of Scudder State Tax Free Trust, which the undersigned
is entitled to vote at the Special Meeting of Stockholders of the Fund to be held at the offices of Scudder Kemper Investments,
Inc., __ Floor, Two International Place, Boston, Massachusetts 02110, on Thursday, September 2, 1999 at 8:30 a.m., Eastern time, and
at any adjournments thereof.
Unless otherwise specified in the boxes provided, the undersigned's vote will be cast FOR each item listed on the reverse side.
- ------------------------------------------------------------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Please sign exactly as your name or names appear.
When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ------------------------------------------------------------ ------------------------------------------------------------
- ------------------------------------------------------------ ------------------------------------------------------------
- ------------------------------------------------------------ ------------------------------------------------------------
<PAGE>
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ------------------------------------------------------------------
SCUDDER PENNSYLVANIA TAX FREE FUND
- ------------------------------------------------------------------
For Against Abstain
Mark box at right if an address change or comment [ ] 1. To approve an Agreement and Plan of [ ] [ ] [ ]
has been noted on the reverse side of this card Reorganization for the Fund
The Proxies are authorized to vote upon such other business as may
properly come before the Meeting.
-----------------
Please be sure to sign and date this Proxy. Date
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Stockholder sign here Co-owner sign here
</TABLE>
<PAGE>
PROSPECTUS OF MUNICIPAL BONDS
DATED MARCH 1, 1999 IS INCORPORATED BY
REFERENCE TO ITS N-1A REGISTRATION STATEMENT
<PAGE>
PART B
INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 17, 1999
STATEMENT OF ADDITIONAL INFORMATION DATED JULY __, 1999
Acquisition of the Assets of
SCUDDER PENNSYLVANIA TAX FREE FUND
("Tax Free")
a series of
SCUDDER STATE TAX FREE TRUST
Two International Place
Boston, Massachusetts 02110
(617) 295-2572
By and in Exchange for Shares of
SCUDDER MANAGED MUNICIPAL BONDS
("Municipal Bonds")
a series of
SCUDDER MUNICIPAL TRUST
Two International Place
Boston, Massachusetts 02110
(617) 295-2572
This Statement of Additional Information, relating specifically to the
proposed transfer of all or substantially all of the assets of Tax Free, a
series of Scudder State Tax Free Trust, to Municipal Bonds, a series of Scudder
Municipal Trust, in exchange for shares of Municipal Bonds and the assumption by
Municipal Bonds of liabilities of Tax Free, consists of this cover page and the
following described documents, each of which accompanies this Statement of
Additional Information and is incorporated herein by reference.
1. Statement of Additional Information for Municipal Bonds, dated March 1,
1999.
2. Statement of Additional Information for Tax Free, dated August 1, 1998.
3. Annual Report of Municipal Bonds for the year ended December 31, 1998.
4. Annual Report of Tax Free for the year ended March 31, 1999.
This Statement of Additional Information is not a prospectus. A combined
Prospectus/Proxy Statement, dated July __, 1999, relating to the
above-referenced matter may be obtained without charge by calling or writing
Municipal Bonds at the telephone number or address set forth above. This
Statement of Additional Information should be read in conjunction with the
combined Prospectus/Proxy Statement.
B-1
<PAGE>
THE ANNUAL REPORT AND STATEMENT OF ADDITIONAL INFORMATION OF
MUNICIPAL BONDS DATED DECEMBER 31, 1998 AND MARCH 1, 1999,
RESPECTIVELY, ARE INCORPORATED BY REFERENCE
TO THE MOST RECENT FILINGS THEREOF BY
SCUDDER MUNICIPAL TRUST
<PAGE>
THE ANNUAL REPORT AND PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION OF TAX FREE DATED MARCH 31, 1999 AND AUGUST 1,
1998, RESPECTIVELY, ARE INCORPORATED BY REFERENCE
TO THE MOST RECENT FILINGS THEREOF BY
SCUDDER STATE TAX FREE TRUST
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. 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, 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, he 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:
C-1
<PAGE>
(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, 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
C-2
<PAGE>
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 16. EXHIBITS
1. (a) Amended and Restated Declaration of Trust dated December 8, 1987.
(Incorporated by reference to Post-Effective Amendment No. 34 to the
Registration Statement on Form N-1A.)
(b) 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 on Form N-1A.)
(c) 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 on Form N-1A.)
(d) Establishment and Designation of Series dated November 6, 1987.
(Incorporated by reference to Post-Effective Amendment No. 34 to the
Registration Statement on Form N-1A.)
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 on Form N-1A.)
C-3
<PAGE>
(b) Amendment to the By-laws of the Registrant as amended through
December 8, 1987. (Incorporated by reference to Post-Effective Amendment No. 34
to the Registration Statement on Form N-1A.)
(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 on Form N-1A.)
(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 on Form N-1A.)
3. Not applicable.
4. Form of Agreement and Plan of Reorganization is filed herewith as
Exhibit A.
5. Not applicable.
6. (a) Investment Management Agreement between the Registrant (on behalf
of Scudder Managed Municipal Bonds) and Scudder Kemper Investments, Inc. dated
September 7, 1998. (Incorporated by reference to Post-Effective Amendment No. 36
to the Registration Statement on Form N-1A.)
(b) Investment Management Agreement between the Registrant (on behalf
of Scudder High Yield Tax Free Fund) and Scudder Kemper Investments, Inc. dated
September 7, 1998. (Incorporated by reference to Post-Effective Amendment No. 36
to the Registration Statement on Form N-1A.)
7. Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc. dated September 7, 1988. (Incorporated by reference to Exhibit
(e) to Post-Effective Amendment No. 36 to the Registration Statement on Form
N-1A.)
8. Not applicable.
9. (a) Custodian Contract 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 on Form N-1A.)
(b) Fee schedule for Exhibit 9(a). (Incorporated by reference to
Post-Effective Amendment No. 34 to the Registration Statement on Form N-1A.)
(c) Amendment No. 1 to the Custodian Contract 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 on
Form N-1A.)
C-4
<PAGE>
(d) 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 on
Form N-1A.)
(e) 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 on
Form N-1A.)
(f) 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 on Form N-1A.)
(g) Subcustodian Agreement between Irving Trust Company and State
Street Bank dated November 30, 1987. (Incorporated by reference to
Post-Effective Amendment No. 34 to the Registration Statement on Form N-1A.)
(h) 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 on Form N-1A.)
(i) 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 on Form N-1A.)
(j) 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 on Form N-1A.)
(k) 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 on Form N-1A.)
(l) Fee Schedule for Exhibit 9(a). (Incorporated by reference to
Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A.)
10. Not applicable.
11. Opinion and Consent of Willkie Farr & Gallagher. To be filed by
amendment.
12. Form of opinion and consent of Willkie Farr & Gallagher supporting the
tax matters and consequences to shareholders discussed in the prospectus. To be
filed by amendment.
C-5
<PAGE>
13. (a) Transfer Agency, Service Agreement and Fee Schedule between the
Registrant and Scudder Service Agreement dated October 2, 1989. (Incorporated by
reference to Post-Effective Amendment No. 34 to the Registrant Statement on Form
N-1A.)
(b) Revised Fee Schedule dated October 1, 1995 for Exhibit 13(a).
(Incorporated by reference to Post-Effective Amendment No. 30 to the Registrant
Statement on Form N-1A.)
(c) 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 to the Registrant Statement on Form N-1A.)
(d) 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 to the Registrant Statement on Form N-1A.)
(e) Revised Fee Schedule dated October 1, 1996 for Exhibit 13(a).
(Incorporated by reference to Post-Effective Amendment No. 32 to the Registrant
Statement on Form N-1A.)
14. Consent of PricewaterhouseCoopers LLP. To be filed by amendment.
15. Inapplicable.
16. Powers of Attorney filed herewith.
17. (a) Form of proxy card filed herewith.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR
230.145c], the reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-6
<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 Registration
Statement on Form N-14 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston and The Commonwealth of Massachusetts on
the 17th day of May, 1999.
SCUDDER MUNICIPAL TRUST
By: /s/ John Millette
---------------------
John Millette
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. By so signing, the undersigned in his
capacity as trustee or officer, or both, as the case may be of the Registrant,
does hereby appoint Caroline M. Pearson, John Millette, Burton M. Leibert and
John Kim and each of them, severally, or if more than one acts, a majority of
them, his/her true and lawful attorney and agent to execute in his name, place
and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DANIEL PIERCE President May 3, 1999
- -------------------------------
Daniel Pierce
/s/ HENRY P. BECTON, JR. Trustee May 3, 1999
- -------------------------------
Henry P. Becton, Jr.
/s/ DAWN-MARIE DRISCOLL Trustee May 3, 1999
- -------------------------------
Dawn-Marie Driscoll
/s/ PETER B. FREEMAN Trustee May 3, 1999
- -------------------------------
Peter B. Freeman
/s/ GEORGE M. LOVEJOY, JR. Trustee May 3, 1999
- -------------------------------
George M. Lovejoy, Jr.
C-7
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WESLEY W. MARPLE, JR. Trustee May 3, 1999
- -------------------------------
Wesley W. Marple, Jr.
/s/ KATHRYN L. QUIRK Trustee May 3, 1999
- -------------------------------
Kathryn L. Quirk
/s/ JEAN C. TEMPEL Trustee May 3, 1999
- -------------------------------
Jean C. Tempel
/s/ JOHN R. HEBBLE Treasurer (Principal May 3, 1999
- ------------------------------- Financial and Accounting
John R. Hebble Officer)
C-8
