Filed electronically with the Securities and Exchange Commission on
September 29, 2000
File No. 2-57139
File No. 811-2671
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /___/
Pre-Effective Amendment _____ /___/
Post-Effective Amendment No. 45 /_X_/
--
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 36 /_X_/
--
Scudder Municipal Trust
-----------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place
-----------------------
Boston, Massachusetts 02110-4103
--------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2572
--------------
John Millette
-------------
Scudder Kemper Investments, Inc.
--------------------------------
Two International Place
-----------------------
Boston, Massachusetts 02110-4103
--------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/___/ Immediately upon filing pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a) (1)
/___/ 75 days after filing pursuant to paragraph (a) (2)
/_X_/ On October 1, 2000 pursuant to paragraph (b)
/___/ On ______________ pursuant to paragraph (a) (1)
/___/ On ___________ pursuant to paragraph (a) (2) of Rule 485.
If Appropriate, check the following box:
/___/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
SCUDDER
INVESTMENTS(SM)
[LOGO]
----------------------------
RISK MANAGED
----------------------------
Class AARP and Class S Shares
Scudder GNMA Fund
July 17, 2000 As Revised October 1, 2000
Scudder Managed Municipal
Bonds October 1, 2000
Scudder Growth and Income
Fund
April 12, 2000 As Revised October 1, 2000
Scudder Capital Growth Fund
July 17, 2000 As Revised October 1, 2000
Scudder Small Company Stock Fund
July 17, 2000 As Revised October 1, 2000
Scudder Global Fund
January 1, 2000 As Revised October 1, 2000
Prospectus
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder Risk Managed
How the funds work
2 Scudder GNMA Fund
6 Scudder Managed Municipal Bonds
11 Scudder Growth and Income Fund
16 Scudder Capital Growth Fund
20 Scudder Small Company Stock Fund
24 Scudder Global Fund
29 Other Policies and Risks
30 Who Manages and Oversees the Funds
35 Financial Highlights
How to invest in the funds
43 How to Buy, Sell and Exchange
Class AARP Shares
45 How to Buy, Sell and Exchange
Class S Shares
47 Policies You Should Know About
51 Understanding Distributions and Taxes
<PAGE>
How the funds work
On the next few pages, you'll find information about each fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are available to all investors. Unless otherwise noted, all information in this
prospectus applies to both classes.
You can find prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class AARP AGNMX fund number | Class AARP 193
| Class S SGINX | Class S 393
Scudder GNMA Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks to produce a high level of income while actively seeking to
reduce downside risk compared with other GNMA mutual funds. It does this by
investing at least 65% of net assets in "Ginnie Maes": mortgage-backed
securities that are issued or guaranteed by the Government National Mortgage
Association (GNMA). The fund also invests in U.S. Treasury securities. With both
types of securities, the timely payment of interest and principal is guaranteed
by the full faith and credit of the U.S. government. In addition, the fund does
not invest in securities issued by tobacco-producing companies.
In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of Ginnie Maes compared to Treasuries
and decide on allocations for each. Their decisions are generally based on a
number of factors, including changes in supply and demand within the bond
market.
In choosing individual bonds, the managers review each fund's bond
characteristics and compare the yields of shorter maturity bonds to those of
longer maturity bonds.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. In seeking to reduce downside risk, the managers will generally maintain
a shorter duration than other GNMA funds (duration is a measure of sensitivity
to interest rate movements).
While the fund is permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments, and might not use them at
all.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 65% of total assets in Ginnie Maes (and
typically more than that). To the extent that it does buy other securities, they
generally carry the same "full faith and credit" guarantee of the U.S.
Government.
This guarantee doesn't protect the fund against market-driven declines in the
prices or yields of these securities, nor does it apply to shares of the fund
itself. But it does guard against the risk of payment default of principal or
interest with respect to securities that are guaranteed.
2 | Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may interest investors who can accept moderate
volatility and are seeking higher yield than Treasuries, yet
don't want to sacrifice credit quality.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices -- and, in turn, a
fall in the value of your investment. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) An increase in its
duration would make the fund more sensitive to this risk.
Ginnie Maes carry additional risks and may be more volatile than many other
types of debt securities. Any unexpected behavior in interest rates could hurt
the performance of these securities. For example, a large fall in interest rates
could cause these securities to be paid off earlier than expected, forcing the
fund to reinvest the money at a lower rate. Another example: if interest rates
rise or stay high, these securities could be paid off later than expected,
forcing the fund to endure low yields. In both of these examples, changes in
interest rates may involve the risk of capital losses. The result for the fund
could be an increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
3 | Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns of the fund's Class AARP shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class AARP shares and a broad-based market
index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund changed its name from AARP GNMA and U.S. Treasury Fund to Scudder GNMA
Fund. At the same time, the fund changed its strategy to eliminate investment
requirements in U.S. Treasury securities. Consequently, the fund's past
performance may have been different if the current strategy had been in place.
Also at this time, shares of AARP GNMA and U.S. Treasury Fund were redesignated
Class AARP of Scudder GNMA Fund. The performance of Class AARP in the bar chart
and performance table reflects the performance of AARP GNMA and U.S. Treasury
Fund.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class AARP
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 9.72
'91 14.38
'92 6.56
'93 5.96
'94 -1.68
'95 12.83
'96 4.44
'97 8.00
'98 6.79
'99 0.59
2000 Total Return as of June 30: 3.73%
Best Quarter: 4.88%, Q3 1991 Worst Quarter: -2.44%, Q1 1994
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class AARP* 0.59 6.45 6.65
------------------------------------------------------------------------
Index 1.93 8.08 7.87
------------------------------------------------------------------------
Index: Lehman Brothers GNMA Index, an unmanaged market-weighted measure of all
fixed-rate securities backed by mortgage pools of GNMA.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
4 | Scudder GNMA Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------
Management Fee 0.40%
--------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------
Other Expenses* 0.30%
-------------
--------------------------------------------------------------------------
Total Annual Operating Expenses 0.70%
--------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective on July 17, 2000.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------
$72 $224 $390 $871
-----------------------------------------------------------------------
5 | Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class AARP AMUBX fund number | Class AARP 166
| Class S SCMBX | Class S 066
Scudder Managed Municipal Bonds
--------------------------------------------------------------------------------
Investment Approach
The fund seeks income exempt from regular federal income tax while actively
seeking to reduce downside risk as compared with other tax-free income funds. It
does this by investing at least 80% of net assets in securities of
municipalities across the United States and in other securities whose income is
free from regular federal income tax. The fund does not invest in securities
issued by tobacco-producing companies.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes), as well as municipal lease obligations and investments
representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Credit Quality Policies
This fund normally invests at least 65% of net assets in municipal securities of
the top three grades of credit quality.
The fund could put up to 10% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds generally pay higher yields and have higher volatility and
higher risk of default on payments of interest or principal.
6 | Scudder Managed Municipal Bonds
<PAGE>
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including (i) typically maintaining a high level of portfolio quality, (ii)
keeping the fund's duration generally shorter than comparable mutual funds, and
(iii) primarily focusing on premium coupon bonds, which have lower volatility in
down markets than bonds selling at a discount.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it similar
to that of the Lehman Brothers Municipal Bond Index (13.43 years as of
5/31/2000). Also, while they're permitted to use various types of derivatives
(contracts whose value is based on, for example, indices or securities), the
managers don't intend to use them as principal investments and might not use
them at all.
7 | Scudder Managed Municipal Bonds
<PAGE>
--------------------------------------------------------------------------------
[ICON] Taxpayers who are in a moderate to high tax bracket and who are
looking for current income may want to consider this fund.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's dollar-weighted
average maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may emphasize investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could invest in illiquid municipal lease
obligations, which are more likely to default or to become difficult to sell
because they carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them; this risk may be
greater for junk bonds than for investment-grade bonds
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o political or legal actions could change the way the fund's dividends
are taxed
8 | Scudder Managed Municipal Bonds
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns of the fund's Class S shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class S shares and a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 6.77
'91 12.23
'92 8.98
'93 13.32
'94 -6.04
'95 17.12
'96 4.15
'97 9.29
'98 6.23
'99 -1.96
2000 Total Return as of June 30: 3.80%
Best Quarter: 6.69%, Q1 1995 Worst Quarter: -6.17%, Q1 1994
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class S* -1.96 6.78 6.80
------------------------------------------------------------------------
Index -2.06 6.91 6.89
------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
* Performance for Class AARP shares is not provided because this class
does not have a full calendar year of performance.
9 | Scudder Managed Municipal Bonds
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares you pay them indirectly.
--------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------
Management Fee 0.49%
--------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------
Other Expenses* 0.15%
-----------
--------------------------------------------------------------------------
Total Annual Operating Expenses 0.64%
--------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.15%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 31, 2000.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
$65 $205 $357 $798
------------------------------------------------------------------------
10 | Scudder Managed Municipal Bonds
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class AARP ACDGX fund number | Class AARP 164
| Class S SCDGX | Class S 064
Scudder Growth and Income Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital, current income and growth of income
while actively seeking to reduce downside risk as compared with other growth and
income funds. The fund invests at least 65% of total assets in equities, mainly
common stocks. Although the fund can invest in companies of any size and from
any country, it invests primarily in large U.S. companies. The fund does not
invest in securities issued by tobacco-producing companies.
In choosing stocks for the fund, the portfolio managers consider both yield and
other valuation and growth factors, meaning that they focus the fund's
investments on securities of U.S. companies whose dividend and earnings
prospects are believed to be attractive relative to the fund's benchmark index,
the S&P 500. The fund may invest in dividend paying and non-dividend paying
stocks.
The managers use bottom-up analysis, looking for companies with strong prospects
for continued growth of capital and earnings.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented in the fund's portfolio.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While most of the fund's investments are common stocks, some may be other types
of equities, such as convertible securities and preferred stocks.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
might not use them at all.
11 | Scudder Growth and Income Fund
<PAGE>
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce risk,
including: (i) managing risk associated with investment in specific companies by
using fundamental analysis, valuation, and by adjusting position sizes; (ii)
portfolio construction emphasizing diversification, blending stocks with a
variety of different attributes, including value and growth stocks; and (iii)
diversifying across many sectors and industries.
The fund normally will, but is not obligated to, sell a stock if its yield or
growth prospects are expected to be below the benchmark average. It may also
sell a stock when it reaches a target price or when the managers believe other
investments offer better opportunities.
12 | Scudder Growth and Income Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may make sense for investors who are looking for a
relatively conservative fund to provide growth and some current
income.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. Because a stock represents ownership in its issuer,
stock prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry or a particular size of
company, factors affecting that industry or size of company could affect the
value of portfolio securities. For example, a rise in unemployment could hurt
manufacturers of consumer goods, and large company stocks at times may not
perform as well as stocks of smaller companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies or other matters
o to the extent that the fund invests for income, it may miss
opportunities in faster-growing stocks
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it could be hard to value some investments or to get an
attractive price for them
13 | Scudder Growth and Income Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and a broad based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index vary over time. All figures on this
page assume reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 -2.33
'91 28.16
'92 9.57
'93 15.59
'94 2.60
'95 31.18
'96 22.18
'97 30.31
'98 6.07
'99 6.15
2000 Total Return as of June 30: 1.06%
Best Quarter: 15.26%, Q2 1997 Worst Quarter: -13.39%, Q3 1998
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class S* 6.15 18.65 14.36
------------------------------------------------------------------------
Index 21.04 28.54 18.20
------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Total returns for 1992 would have been lower if operating expenses hadn't been
reduced.
* Performance for Class AARP shares is not provided because this class
does not have a full calendar year of performance.
14 | Scudder Growth and Income Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares you pay them indirectly.
--------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------
Management Fee 0.45%
--------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------
Other Expenses* 0.30%
-----------
--------------------------------------------------------------------------
Total Annual Operating Expenses 0.75%
--------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective on August 14, 2000.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
$77 $240 $417 $930
------------------------------------------------------------------------
15 | Scudder Growth and Income Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class AARP ACGFX fund number | Class AARP 198
| Class S SCPGX | Class S 398
Scudder Capital Growth Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk compared with other growth mutual funds. The fund invests
at least 65% of total assets in equities, mainly common stocks of U.S.
companies. Although the fund can invest in companies of any size, it generally
focuses on established companies with market values of $3 billion or more. The
fund does not invest in securities issued by tobacco-producing companies.
In choosing stocks, the portfolio managers look for individual companies that
have displayed above-average earnings growth compared to other growth companies
and that have strong product lines, effective management and leadership
positions within core markets. The managers also analyze each company's
valuation, stock price movements and other factors.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including:
o focusing on high quality companies with reasonable valuations
o diversifying broadly among companies, industries and sectors
o limiting the majority of the portfolio to 3.5% in any one issuer (other
funds may invest 5% or more)
Depending on their outlook, the managers may increase or reduce the fund's
exposure to a given industry or company. The fund will normally sell a stock
when the managers believe it is too highly valued, its fundamental qualities
have deteriorated or its potential risks have increased.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While most of the fund's investments are common stocks, some may be other types
of equities, such as convertible securities and preferred stocks.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
might not use them at all.
16 | Scudder Capital Growth Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may make sense for investors interested in a long-term
investment that seeks to lower its share price volatility
compared with other growth mutual funds.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt fund performance, cause you to
lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the medium and large growth company portions of
the U.S. stock market. When prices of these stocks fall, you should expect the
value of your investment to fall as well. At times, large or medium company
stocks may not perform as well as stocks of smaller companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example, a
rise in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
17 | Scudder Capital Growth Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns of the fund's Class AARP shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the fund's Class AARP shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund was reorganized from AARP Capital Growth Fund, a series of AARP Growth
Trust, into Class AARP of Scudder Capital Growth Fund, a newly created series of
Investment Trust. The performance of Class AARP in the bar chart and performance
table reflects the performance of AARP Capital Growth Fund.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class AARP
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 -15.78
'91 40.53
'92 4.72
'93 15.98
'94 -10.04
'95 30.54
'96 20.62
'97 35.08
'98 23.73
'99 35.44
2000 Total Return as of June 30: 3.12%
Best Quarter: 25.83%, Q4 1998 Worst Quarter: -21.27%, Q3 1990
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class AARP* 35.44 28.94 16.51
------------------------------------------------------------------------
Index 21.04 28.56 18.21
------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
18 | Scudder Capital Growth Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------
Management Fee 0.58%
--------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------
Other Expenses* 0.30%
-------------
--------------------------------------------------------------------------
Total Annual Operating Expenses 0.88%
--------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 17, 2000.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------
$90 $281 $488 $1,084
-----------------------------------------------------------------------
19 | Scudder Capital Growth Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class AARP ASCSX fund number | Class AARP 139
| Class S SSLCX | Class S 339
Scudder Small Company Stock Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk as compared with other small company stock funds. It does
this by investing at least 65% of total assets in common stocks of small U.S.
companies with potential for above-average long-term capital growth. The fund
normally focuses on companies whose market capitalizations are below $2 billion.
The fund does not invest in securities issued by tobacco-producing companies.
The portfolio managers use a multi-step process to select small company stocks.
A quantitative stock valuation model ranks stocks, favoring those with strong
potential for growth of earnings, reasonable valuations in light of business
prospects and positive stock price movements.
The managers then assemble the fund's portfolio from among the qualifying
stocks, using a portfolio optimizer -- sophisticated portfolio management
software that analyzes the expected return and risk characteristics of each
stock and the overall portfolio.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including:
o focusing on attractively valued securities
o diversifying broadly among industries and companies (typically over
150)
o limiting the majority of the portfolio to 2% in any one issuer (other
funds may invest 5% or more)
The fund will normally sell a stock when it no longer qualifies as a small
company, when it is no longer considered undervalued or when the managers
believe other investments offer better opportunities.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While the fund invests primarily in common stocks, it may invest up to 20% of
total assets in U.S. Government securities.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
might not use them at all.
20 | Scudder Small Company Stock Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund is designed for long-term investors who are looking
for a fund that seeks to temper the risks of investing in small
company stocks.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry, factors affecting that
industry could affect the value of portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o value stocks may be out of favor for certain periods
o the managers could be wrong in their analysis of companies
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it might be hard to value some investments or to get an
attractive price for them
21 | Scudder Small Company Stock Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns of the fund's Class AARP shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the fund's Class AARP shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund was reorganized from AARP Small Company Stock Fund, a series of AARP Growth
Trust, into Class AARP of Scudder Small Company Stock Fund, a newly created
series of Investment Trust. The performance of Class AARP in the bar chart and
performance table reflects the performance of AARP Small Company Stock Fund.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class AARP
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'98 -6.24
'99 -3.53
2000 Total Return as of June 30: -1.72%
Best Quarter: 19.49%, Q2 1999 Worst Quarter: -17.20%, Q3 1998
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year Since Inception
------------------------------------------------------------------------
Fund -- Class AARP* -3.53 6.74**
------------------------------------------------------------------------
Index 21.26 12.71***
------------------------------------------------------------------------
Index: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2,000 small U.S. stocks.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
** Inception of Fund: 2/1/1997.
*** Index comparison begins 1/31/1997.
In the chart, total returns for 1998 would have been lower if operating expenses
hadn't been reduced.
In the table, total returns from inception through 1998 would have been lower if
operating expenses hadn't been reduced.
22 | Scudder Small Company Stock Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------
Management Fee 0.75%
--------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------
Other Expenses* 0.46%
-------------
--------------------------------------------------------------------------
Total Annual Operating Expenses 1.21%
--------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.45%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 17, 2000.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------
$123 $384 $665 $1,466
-----------------------------------------------------------------------
23 | Scudder Small Company Stock Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class AARP ACOBX fund number | Class AARP 107
| Class S SCOBX | Class S 007
Scudder Global Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital while actively seeking to reduce
downside risk as compared with other global growth funds. The fund invests at
least 65% of its total assets in U.S. and foreign equities (equities issued by
U.S. and foreign-based companies). Most of the fund's equities are common
stocks. Although the fund can invest in companies of any size and from any
country, it generally focuses on established companies in countries with
developed economies. The fund does not invest in securities issued by
tobacco-producing companies.
In choosing stocks, the portfolio managers use a combination of two analytical
disciplines:
Bottom-up research. The managers look for companies that are industry leaders,
have strong finances and management, and appear able to make the most of local,
regional and global opportunities.
Growth orientation. The managers primarily invest in companies that offer the
potential for sustainable above-average earnings growth and whose market value
appears reasonable in light of their business prospects.
Analysis of global themes. The managers consider global economic outlooks,
seeking to identify industries and companies that are likely to benefit from
social, political and economic changes.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies, or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
24 | Scudder Global Fund
<PAGE>
The managers intend to keep the fund's holdings diversified across industries
and geographical areas, although, depending on their outlook, they may increase
or reduce the fund's exposure to a given industry or area.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including: (i) diversifying broadly among companies, industries, countries and
regions; (ii) focusing on high quality companies with reasonable valuations; and
(iii) generally focusing on countries with developed economies.
The fund will normally sell a stock when the managers believe its price is
unlikely to go much higher, its fundamentals have deteriorated, other
investments offer better opportunities or in the course of adjusting its
emphasis on a given country.
25 | Scudder Global Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] Long-term investors who want a fund with a broadly diversified
approach to global investing may want to consider this fund.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform, both in the U.S. and abroad. When stock prices fall, you should
expect the value of your investment to fall as well. Foreign stocks tend to be
more volatile than their U.S. counterparts, for reasons ranging from political
and economic uncertainties to a higher risk that essential information may be
incomplete or wrong. These risks tend to be greater in emerging markets, so to
the extent that the fund invests in emerging markets (such as Latin America and
most Pacific Basin countries), it takes on greater risks. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand, and other business risks. These may affect single
companies as well as groups of companies.
A second major factor is currency exchange rates. When the dollar value of a
foreign currency falls, so does the value of any investments the fund owns that
are denominated in that currency. This is separate from market risk, and may add
to market losses or reduce market gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
themes, geographical areas or other matters
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
26 | Scudder Global Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how returns for the fund have varied from year to year,
which may give some idea of risk. The table shows average annual total returns
for the fund and a broad-based market index (which, unlike the fund, does not
have any fees or expenses). The performance of both the fund and the index
varies over time. All figures on this page assume reinvestment of dividends and
distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 -6.40
'91 17.07
'92 4.54
'93 31.10
'94 -4.20
'95 20.53
'96 13.65
'97 17.24
'98 12.59
'99 23.47
2000 Total Return as of June 30: -1.57%
Best Quarter: 15.20%, Q4 1999 Worst Quarter: -13.99%, Q3 1990
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class S* 23.47 17.42 12.38
------------------------------------------------------------------------
Index 25.34 20.25 11.96
------------------------------------------------------------------------
Index: MSCI World Index, an unmanaged capitalization-weighted measure of global
stock markets including the U.S., Canada, Europe, Australasia and the Far East.
* Performance for Class AARP is not provided because this class does not
have a full calendar year of performance.
27 | Scudder Global Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares you pay them indirectly.
------------------------------------------------------------------------
Fee Table
------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
------------------------------------------------------------------------
Management Fee 0.94%
------------------------------------------------------------------------
Distribution (12b-1) Fee None
------------------------------------------------------------------------
Other Expenses* 0.38%
----------------
------------------------------------------------------------------------
Total Annual Operating Expenses 1.32%
------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.375%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective on September 11, 2000.
------------------------------------------------------------------------
Expense Example
------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
$134 $418 $723 $1,590
------------------------------------------------------------------------
28 | Scudder Global Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could change
that fund's investment goal without seeking shareholder approval. However,
Scudder Managed Municipal Bond's policy for investing at least 80% of its net
assets as described earlier in this prospectus cannot be changed without
shareholder approval.
o As a temporary defensive measure, each fund could shift up to 100% of its
assets into investments such as money market securities. This could prevent
losses, but would mean that the fund was not pursuing its goal.
o Scudder GNMA Fund may trade securities actively. This could raise transaction
costs (thus lowering performance) and could mean higher taxable distributions.
o The investment adviser establishes a security's credit grade when it buys the
security, using independent ratings or, for unrated securities, its own credit
ratings. When ratings don't agree, the fund may use the higher rating. If a
security's credit rating falls, the security will be sold unless the adviser
believes this would not be in the shareholders' best interests.
Euro conversion
Funds that invest in foreign securities could be affected by accounting
differences, changes in tax treatment or other issues related to the conversion
of certain European currencies into the euro, which is already underway. The
investment adviser is working to address euro-related issues as they occur and
has been notified that other key service providers are taking similar steps.
Still, there's some risk that this problem could materially affect a fund's
operation (including its ability to calculate net asset value and to handle
purchases and redemptions), its investments or securities markets in general.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
29
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for
managing the funds, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of each
fund's average daily net assets.
Fund Name Fee Paid
------------------------------------------------------------------------
Scudder GNMA Fund 0.40%*
------------------------------------------------------------------------
Scudder Managed Municipal Bonds 0.52%
------------------------------------------------------------------------
Scudder Growth and Income Fund 0.45%
------------------------------------------------------------------------
Scudder Capital Growth Fund 0.60%**
------------------------------------------------------------------------
Scudder Small Company Stock Fund 0.83%***
------------------------------------------------------------------------
Scudder Global Fund 0.94%
------------------------------------------------------------------------
* Reflects management fee paid by AARP GNMA and U.S. Treasury Fund.
** Reflects management fee paid by AARP Capital Growth Fund.
*** Reflects management fee paid by AARP Small Company Stock Fund.
30
<PAGE>
Each fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the fee rates for each fund and the effective date
of these agreements.
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
New Investment Management Fee as of July 17, 2000
--------------------------------------------------------------------------
Scudder GNMA Fund
--------------------------------------------------------------------------
first $5 billion 0.400%
--------------------------------------------------------------------------
next $1 billion 0.385%
--------------------------------------------------------------------------
more than $6 billion 0.370%
--------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
New Investment Management Fee as of July 31, 2000
--------------------------------------------------------------------------
Scudder Managed Municipal Bonds
--------------------------------------------------------------------------
first $2 billion 0.490%
--------------------------------------------------------------------------
next $1 billion 0.465%
--------------------------------------------------------------------------
over $3 billion 0.440%
--------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
New Investment Management Fee as of August 14, 2000
--------------------------------------------------------------------------
Scudder Growth and Income Fund
--------------------------------------------------------------------------
first $14 billion 0.450%
--------------------------------------------------------------------------
next $2 billion 0.425%
--------------------------------------------------------------------------
next $2 billion 0.400%
--------------------------------------------------------------------------
over $18 billion 0.385%
--------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
New Investment Management Fee as of July 17, 2000
--------------------------------------------------------------------------
Scudder Capital Growth Fund
--------------------------------------------------------------------------
first $3 billion 0.580%
--------------------------------------------------------------------------
next $1 billion 0.555%
--------------------------------------------------------------------------
more than $4 billion 0.530%
--------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
New Investment Management Fee as of July 17, 2000
--------------------------------------------------------------------------
Scudder Small Company Stock Fund
--------------------------------------------------------------------------
first $500 million 0.75%
--------------------------------------------------------------------------
next $500 million 0.70%
--------------------------------------------------------------------------
more than $1 billion 0.65%
--------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
New Investment Management Fee as of September 11, 2000
--------------------------------------------------------------------------
Scudder Global Fund
--------------------------------------------------------------------------
first $500 million 1.000%
--------------------------------------------------------------------------
next $500 million 0.950%
--------------------------------------------------------------------------
next $500 million 0.900%
--------------------------------------------------------------------------
next $500 million 0.850%
--------------------------------------------------------------------------
over $2 billion 0.800%
--------------------------------------------------------------------------
31
<PAGE>
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for services relating to investments by AARP members in AARP Class shares of
each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of the AARP Classes of all funds managed by Scudder Kemper.
The fee rates, which decrease as the aggregate net assets of the AARP Classes
become larger, are as follows: 0.07% for the first $6 billion in net assets,
0.06% for the next $10 billion and 0.05% thereafter.
32
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each fund in
this prospectus.
Scudder GNMA Fund Scudder Capital Growth Fund
Richard L. Vandenberg William F. Gadsen
Lead Portfolio Manager Lead Portfolio Manager
o Began investment career in 1975 o Began investment career in 1981
o Joined the adviser in 1993 o Joined the adviser in 1983
o Joined the fund team in 1998 o Joined the fund team in 1989
Scott E. Dolan Scudder Small Company Stock Fund
o Began investment career in 1989
o Joined the adviser in 1989 James M. Eysenbach
o Joined the fund team in 1997 Lead Portfolio Manager
o Began investment career in 1984
John E. Dugenske o Joined the adviser in 1991
o Began investment career in 1990 o Joined the fund team in 1997
o Joined the adviser in 1998
o Joined the fund team in 2000 Calvin S. Young
o Began investment career in 1988
Scudder Managed Municipal Bonds o Joined the adviser in 1990
o Joined the fund team in 1999
Philip G. Condon
Co-lead Portfolio Manager Scudder Global Fund
o Began investment career in 1978
o Joined the adviser in 1983 William E. Holzer
o Joined the fund team in 1998 Lead Portfolio Manager
o Began investment career in 1977
Ashton P. Goodfield o Joined the adviser in 1980
Co-lead Portfolio Manager o Joined the fund team in 1986
o Began investment career in 1986
o Joined the adviser in 1986 Nicholas Bratt
o Joined the fund team in 1998 o Began investment career in 1976
o Joined the adviser in 1976
Scudder Growth and Income Fund o Joined the fund team in 1993
Kathleen T. Millard
Lead Portfolio Manager
o Began investment career in 1983
o Joined the adviser in 1991
o Joined the fund team in 1991
Gregory S. Adams
Portfolio Manager
o Began investment career in 1987
o Joined the adviser in 1999
o Joined the fund team in 1999
33
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders.
The following people comprise each fund's Board.
<TABLE>
<S> <C>
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder Kemper o President, Doris Duke Charitable
Investments, Inc. Foundation
o President of each fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President, WGBH Educational Foundation
Jean C. Tempel
Dawn-Marie Driscoll o Managing Director, First Light
o Executive Fellow, Center for Business Capital, LLC (venture capital fund)
Ethics, Bentley College
o President, Driscoll Associates Steven Zaleznick
(consulting firm) o President and Chief Executive
Officer, AARP Services, Inc.
Edgar Fiedler
o Senior Fellow and Economic Counsellor,
The Conference Board, Inc.
(not-for-profit business research
organization)
Keith R. Fox
o General Partner, The Exeter Group of
Funds
</TABLE>
34
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. Except for the six month periods ended February
29, 2000 and March 31, 2000, this information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover). On July 17, 2000, Scudder Capital Growth Fund and Scudder
Small Company Stock Fund were reorganized from AARP Growth Trust into two newly
created series of Investment Trust. The Financial Highlights provided are for
the AARP Capital Growth Fund and AARP Small Company Stock Fund, both formerly
series of AARP Growth Trust. On July 17, 2000, Scudder GNMA Fund changed its
name from AARP GNMA and U.S. Treasury Fund, a series of AARP Income Trust. The
Financial Highlights provided are for the AARP GNMA and U.S. Treasury Fund. The
existing shares of Scudder Managed Municipal Bonds, Scudder Growth and Income
Fund and Scudder Global Fund were redesignated as Class S on July 31, 2000,
August 14, 2000 and September 11, 2000 respectively.
35
<PAGE>
Scudder GNMA Fund -- Class AARP
<TABLE>
<CAPTION>
Six Months
Ended
March 31, 2000 Years Ended September 30,
------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.61 $15.40 $15.16 $14.91 $15.19 $14.73
-------------------------------------------------------------------------------------
Income from investment operations:
-------------------------------------------------------------------------------------
Net investment
income .47 .94 .99 .98 .99 1.01
-------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on
investment
transactions (.18) (.79) .24 .25 (.28) .46
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Total from
investment
operations .29 .15 1.23 1.23 .71 1.47
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment
income (.47) (.94) (.99) (.98) (.99) (.98)
-------------------------------------------------------------------------------------
Tax return of
capital -- -- -- -- -- (.03)
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.47) (.94) (.99) (.98) (.99) (1.01)
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Net asset value, end
of period $14.43 $14.61 $15.40 $15.16 $14.91 $15.19
---------------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) 2.00(b) 0.99 8.40 8.49 4.79 10.31
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 3,829 4,216 4,593 4,584 4,904 5,252
-------------------------------------------------------------------------------------
Ratio of expenses (%) .73(c) .65 .61 .65 .64 .67
-------------------------------------------------------------------------------------
Ratio of net
investment income (%) 6.45(c) 6.25 6.52 6.51 6.55 6.77
-------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 308(a)(c) 245(a) 160 87 83 70
-------------------------------------------------------------------------------------
</TABLE>
(a) The portfolio turnover rates including mortgage dollar roll
transactions were 363% and 258% for the periods ended March 31, 2000
and September 30, 1999, respectively.
(b) Not annualized
(c) Annualized
36
<PAGE>
Scudder Managed Municipal Bonds -- Class S
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000(a) 1999(b) 1998(c) 1997(c) 1996(c) 1995(c)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.98 $ 9.18 $ 9.13 $ 8.84 $ 8.94 $ 8.07
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income .46 .19 .45 .46 .45 .48
-------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.51) (.20) .10 .34 (.10) .87
-------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment operations (.05) (.01) .55 .80 .35 1.35
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment income (.46) (.19) (.45) (.46) (.45) (.48)
-------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.04) -- (.05) (.05) -- --
-------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.50) (.19) (.50) (.51) (.45) (.48)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 8.43 $ 8.98 $ 9.18 $ 9.13 $ 8.84 $ 8.94
-------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (.62) (.17)** 6.23 9.29 4.15 17.12
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 664 713 737 728 737 775
-------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .66(d) .64* .62 .64 .63 .63
-------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .65(d) .64* .62 .64 .63 .63
-------------------------------------------------------------------------------------
Ratio of net investment income (%) 5.27 4.92* 4.96 5.12 5.20 5.59
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 47 14* 9 10 12 18
-------------------------------------------------------------------------------------
</TABLE>
(a) For the year ended May 31, 2000.
(b) For the five months ended May 31, 1999. On August 10, 1998 the Board of
Trustees of the Trust changed the fiscal year end of the Fund from
December 31 to May 31.
(c) Years ended December 31.
(d) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .65%
and .64%, respectively (see Financial Statements).
* Annualized
** Not annualized
37
<PAGE>
Scudder Growth and Income Fund -- Class S
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $26.31 $27.33 $23.23 $20.23 $16.26
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income (loss) .48(a) .62(a) .62(a) .60(a) .55
-------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions 1.11 1.06 6.26 3.84 4.46
-------------------------------------------
-------------------------------------------------------------------------------------
Total from investment operations 1.59 1.68 6.88 4.44 5.01
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment income (.51) (.61) (.58) (.57) (.56)
-------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.70) (2.09) (2.20) (.87) (.48)
-------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (1.21) (2.70) (2.78) (1.44) (1.04)
-------------------------------------------------------------------------------------
Net asset value, end of period $26.69 $26.31 $27.33 $23.23 $20.23
-------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) 6.15 6.07 30.31 22.18 31.18
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 6,765 7,582 6,834 4,186 3,061
-------------------------------------------------------------------------------------
Ratio of expenses (%) .80 .74 .76 .78 .80
-------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.76 2.20 2.31 2.77 3.10
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 70 41 22 27 27
-------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
38
<PAGE>
Scudder Capital Growth Fund -- Class AARP
<TABLE>
<CAPTION>
Six Months
Ended
March 31,
2000 Years Ended September 30,
--------------------------------------------------------------------------------------
(Unaudited) 1999(a) 1998(a) 1997(a) 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $62.68 $51.24 $57.84 $43.47 $38.36 $31.74
--------------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------------
Net investment income
(loss) (.04) .04 .28 .34 .42 .36
--------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions 17.53 18.19 (2.26) 18.43 5.59 6.91
--------------------------------------------------------
--------------------------------------------------------------------------------------
Total from investment
operations 17.49 18.23 (1.98) 18.77 6.01 7.27
--------------------------------------------------------
--------------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------------
Net investment income (.04) (.24) (.31) (.41) (.39) (.01)
--------------------------------------------------------------------------------------
Net realized gains on
investment transactions (5.40) (6.55) (4.31) (3.99) (.51) (.64)
--------------------------------------------------------
--------------------------------------------------------------------------------------
Total distributions (5.44) (6.79) (4.62) (4.40) (.90) (.65)
--------------------------------------------------------
--------------------------------------------------------------------------------------
Net asset value, end of
period $74.73 $62.68 $51.24 $57.84 $43.47 $38.36
--------------------------------------------------------
--------------------------------------------------------------------------------------
Total Return (%) 28.25(b) 36.83 (3.39) 46.72 15.97 23.47
--------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 2,448 1,735 1,247 1,228 826 692
--------------------------------------------------------------------------------------
Ratio of expenses (%) .90(c) .91 .87 .92 .90 .95
--------------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (.11)(c) .07 .50 .70 1.05 1.00
--------------------------------------------------------------------------------------
Portfolio turnover rate (%) 79(c) 68 53 39 65 98
--------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Not annualized
(c) Annualized
39
<PAGE>
Scudder Small Company Stock Fund -- Class AARP
<TABLE>
<CAPTION>
For the Period
February 1, 1997
Six Months Ended Years Ended (b) to
March 31, 2000 September 30, September 30,
-------------------------------------------------------------------------------------
(Unaudited) 1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $17.89 $16.93 $20.02 $15.00
-------------------------------------------------------------------------------------
Income from investment operations:
-------------------------------------------------------------------------------------
Net investment income
(loss) (a) (.05) .02 .01 .04
-------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions .01(g) .96 (2.98) 4.98
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment
operations (.04) .98 (2.97) 5.02
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment income (.02) (.02) (.04) --
-------------------------------------------------------------------------------------
Net realized gains on
investment transactions -- -- (.08) --
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.02) (.02) (.12) --
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Net asset value, end of
period $17.83 $17.89 $16.93 $20.02
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (0.22)(d) 5.70 (14.91)(c) 33.53(c)(d)
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 52 66 97 50
-------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.93(e)(f) 1.70 1.80 2.79(e)
-------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.88(e)(f) 1.70 1.75 1.75(e)
-------------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (.43)(e) .13 .07 .40(e)
-------------------------------------------------------------------------------------
Portfolio turnover rate
(%) 56(e) 17 12 5(e)
-------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) Total return would have been lower had certain expenses not been
reduced.
(d) Not annualized
(e) Annualized
(f) The annualized ratios of operating expenses excluding reorganization
costs before and after expense reductions were 1.80% and 1.75%,
respectively, for the six months ended March 31, 2000 (see Financial
Statements).
(g) The amount shown may not agree with the change in the aggregate gains
and losses in the portfolio securities for the period because of the
timing of sales and repurchases of the fund's shares in relation to
fluctuating market values for the portfolio.
40
<PAGE>
Scudder Global Fund -- Class S
<TABLE>
<CAPTION>
2000(b) 1999(c) 1999(d) 1998(d) 1997(d) 1996(d) 1995(d)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $31.25 $31.30 $32.41 $33.67 $28.73 $25.64 $23.93
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment
income (loss) .07(a) .02(a) .23(a) .38(a) .17(a) .24 .25
-------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on
investment
transactions 3.15 (.07) 1.82 3.82 6.58 3.94 1.91
-----------------------------------------------------------------
-------------------------------------------------------------------------------------
Total from
investment
operations 3.22 (.05) 2.05 4.20 6.75 4.18 2.16
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment
income (.20) -- (.55) (.88) (.28) (.25) (.11)
-------------------------------------------------------------------------------------
Net realized
gains on
investment
transactions (3.91) -- (2.61) (4.58) (1.53) (.84) (.34)
-----------------------------------------------------------------
-------------------------------------------------------------------------------------
Total
distributions (4.11) -- (3.16) (5.46) (1.81) (1.09) (.45)
-------------------------------------------------------------------------------------
Net asset value,
end of period $30.36 $31.25 $31.30 $32.41 $33.67 $28.73 $25.64
-----------------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) 10.20** (.16)** 7.18 14.93 24.91 16.65 9.11
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 1,591 1,553 1,610 1,766 1,604 1,368 1,168
-------------------------------------------------------------------------------------
Ratio of expenses
(%) 1.37* 1.36* 1.35 1.34 1.37 1.34 1.38
-------------------------------------------------------------------------------------
Ratio of net
investment income
(loss) (%) .43* .44* .79 1.19 .59 .84 1.03
-------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 82* 29* 70 51 41 29 44
-------------------------------------------------------------------------------------
</TABLE>
(a) Per share amounts have been calculated using average shares
outstanding.
(b) For the six months ended February 29, 2000 (Unaudited).
(c) For the two months ended August 31, 1999. On June 7, 1999 the Fund
changed its fiscal year end from June 30 to August 31.
(d) Years ended June 30.
* Annualized
** Not annualized
41
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
As noted earlier, there are two classes of shares of each fund available through
this prospectus. The instructions for buying and selling each class are slightly
different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are followed
by instructions for buying and selling Class S shares. Be sure to use the
appropriate table when placing any orders to buy, exchange or sell shares in
your account.
<PAGE>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $50 minimum with an Automatic
accounts Investment Plan, Payroll
Deduction or Direct Deposit
$500 or more for IRAs
------------------------------------------------------------------------------------
By mail o For enrollment forms, call Send a personalized investment
1-800-253-2277 slip or short note that
includes:
o Fill out and sign an
enrollment form o fund and class name
o Send it to us at the o account number
appropriate address, along
with an investment check o check payable to "The AARP
Investment Program"
------------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
------------------------------------------------------------------------------------
With an o Fill in the information o To set up regular investments
automatic required on your enrollment from a bank checking account,
investment plan form and include a voided check call 1-800-253-2277 (minimum
$50)
------------------------------------------------------------------------------------
Payroll Deduction o Select either of these o Once you specify a dollar
or Direct Deposit options on your enrollment form amount (minimum $50),
and submit it. You will receive investments are automatic.
further instructions by mail.
-----------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
-----------------------------------------------------------------------------------
On the Internet o Go to "services and forms -- o Call 1-800-253-2277 to ensure
how to open an account" at you have electronic services
aarp.scudder.com
o Register at aarp.scudder.com
o Print out a prospectus and an
enrollment form o Follow the instructions for
buying shares with money from
o Complete and return the your bank account
enrollment form with your check
-----------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
[ICON] Regular mail:
The AARP Investment Program, PO Box 2540, Boston, MA 02208-2540
Express, registered or certified mail:
The AARP Investment Program, 66 Brooks Drive, Braintree, MA
02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
-------------------------------------------------------------------------------
43
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Class AARP Exchanging into another fund Selling shares
-----------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 or more for IRAs) most for over $100,000, can
only be ordered in writing; if
you're in doubt, see page 49
-----------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
-----------------------------------------------------------------------------------
Using Easy-Access o Call 1-800-631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
-----------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page)
o your account number o your account number
o names of the funds, class o name of the fund, class and
andnumber of shares or dollar number of shares or dollar
amount you want to exchange amount you want to redeem
-----------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account, call
1-800-253-2277
-----------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
-----------------------------------------------------------------------------------
On the Internet o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for
making on-line exchanges
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Services For Class AARP Investors
--------------------------------------------------------------------------------
<S> <C>
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m. EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Services for o AARP Lump Sum Service For help in making a decision about a lump
participants: sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs.
o AARP Goal Setting and Asset Allocation Service For allocating
assets and measuring investment progress.
o For more information, please call 1-800-253-2277.
---------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Class S First investment Additional investments
-----------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
-----------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address, along
with an investment check o account number
o check payable to "The Scudder
Funds"
-----------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
-----------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
-----------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include from a bank checking account,
a voided check call 1-800-SCUDDER
-----------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
-----------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudder.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application
o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
45
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
-----------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
you're in doubt, see page 49
$100 or more for exchanges
between existing accounts
-----------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
-----------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
-----------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class and account o the fund, class and account
number you're exchanging out number from which you want to
of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s)
fund you want to exchange into and address, as they appear on
your account
o your name(s), signature(s)
and address, as they appear on o a daytime telephone number
your account
o a daytime telephone number
-----------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
-----------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
-----------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
-----------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8
a.m. and 8 p.m. Eastern time on any fund business day by calling
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
Ordinarily, your investment in Scudder GNMA Fund and Scudder Managed Municipal
Bonds will start to accrue dividends the next business day after your purchase
is processed.
When selling shares, you'll generally receive the dividend for the day on which
your shares were sold.
47
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders
with Internet access. To get up-to-date information, review
balances or even place orders for exchanges, go to
aarp.scudder.com (Class AARP) or www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP Shares
--------------------------------------------------------------------------
Call Easy-Access Line, the AARP Program Automated Information Line, at
1-800-631-4636
--------------------------------------------------------------------------
For Class S Shares
--------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
48
<PAGE>
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share price
For each share class of each fund, the share price is the net asset value per
share, or NAV. To calculate NAV, each share class of each fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
-------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, a fund's value for a security is likely to be different from quoted market
prices.
To the extent that a fund invests in securities that are traded primarily in
foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the funds don't price their shares.
49
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you
can always send us your order in writing.
--------------------------------------------------------------------------------
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o for Class AARP and Class S shareholders, close your account and send
you the proceeds if your balance falls below $1,000; for Class S
shareholders, charge you $10 a year if your account balance falls below
$2,500; in either case, we will give you 60 days' notice so you can
either increase your balance or close your account (these policies
don't apply to retirement accounts, to investors with $100,000 or more
in Scudder fund shares or in any case where a fall in share price
created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; generally, the fund won't make
a redemption in kind unless your requests over a 90-day period total
more than $250,000 or 1% of the value of the fund's net assets,
whichever is less
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
50
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always
a good idea to ask your tax professional about the tax
consequences of your investments, including any state and local
tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds intend to pay dividends and distributions on the following schedule,
and if necessary, may do so at other times as well:
------------------------------------------------------------------------
Scudder GNMA Fund monthly
------------------------------------------------------------------------
Scudder Managed Municipal Bonds monthly
------------------------------------------------------------------------
Scudder Growth and Income Fund quarterly*
------------------------------------------------------------------------
Scudder Capital Growth Fund annually, December
------------------------------------------------------------------------
Scudder Small Company Stock Fund annually, December
------------------------------------------------------------------------
Scudder Global Fund annually, November or December
------------------------------------------------------------------------
* March, June, September and December
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
51
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------
Dividends from Scudder Managed Municipal Bonds are generally free from federal
income tax for most shareholders. However, there are a few exceptions:
o a portion of the fund's dividends may be taxable as ordinary income if
it came from investments in taxable securities
o because the fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may
owe taxes on a portion of your dividends if you are among those
investors who must pay AMT
You may be able to claim a tax credit or deduction for your share of any foreign
taxes Scudder Global Fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive (except from Scudder GNMA Fund and Scudder Managed
Municipal Bonds).
52
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call 1-800-253-2277 (Class
AARP) or 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder. Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment Program
from Scudder Scudder Funds SEC
PO Box 2540 Boston, MA PO Box 2291 450 Fifth Street,
02208-2540 Boston, MA 02107-2291 N.W. Washington, D.C.
1-800-253-2277 1-800-SCUDDER 20549-0102
aarp.scudder.com www.scudder.com 1-202-942-8090
www.sec.gov
Fund Name SEC File #
------------------------------------------------------------------------
Scudder GNMA Fund 811-4049
------------------------------------------------------------------------
Scudder Managed Municipal Bonds 811-2671
------------------------------------------------------------------------
Scudder Growth and Income Fund 811-43
------------------------------------------------------------------------
Scudder Capital Growth Fund 811-43
------------------------------------------------------------------------
Scudder Small Company Stock Fund 811-43
------------------------------------------------------------------------
Scudder Global Fund 811-4670
------------------------------------------------------------------------
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
--------------------------------------------------------------------------------
BOND/TAX FREE
--------------------------------------------------------------------------------
Scudder National Tax
Free Funds
Class AARP and Class S Shares
Scudder Medium Term
Tax Free Fund
Scudder High Yield
Tax Free Fund
Prospectus
October 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder National Tax Free Funds
How the funds work
2 Scudder Medium Term Tax Free Fund
6 Scudder High Yield Tax Free Fund
10 Other Policies and Risks
11 Who Manages and Oversees the Funds
14 Financial Highlights
How to invest in the funds
17 How to Buy, Sell and Exchange
Class AARP Shares
19 How to Buy, Sell and Exchange
Class S Shares
21 Policies You Should Know About
25 Understanding Distributions and Taxes
<PAGE>
How the funds work
On the next few pages, you'll find information about each fund's investment
goal, the main strategy it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are available to all investors. Unless otherwise noted, all information in this
prospectus applies to both classes.
You can find prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCMTX fund number | Class AARP 145
| Class S 045
Scudder Medium Term Tax Free Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks a high level of income free from regular federal income taxes and
seeks to limit principal fluctuation. The fund invests at least 80% of net
assets in securities of municipalities across the United States and in other
securities whose income is free from regular federal income tax and alternative
minimum tax (AMT).
The fund can buy many types of municipal securities with maturities of 15 years
or less. These may include revenue bonds (which are backed by revenues from a
particular source) and general obligation bonds (which are typically backed by
the issuer's ability to levy taxes), as well as municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
five and ten years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Credit Quality Policies
This fund normally invests at least 65% of net assets in municipal securities of
the top three grades of credit quality.
The fund could put up to 35% of net assets in bonds rated in the fourth credit
grade, which is still considered investment-grade.
--------------------------------------------------------------------------------
2 | Scudder Medium Term Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may make sense for taxpayers in a moderate to high tax
bracket who want higher yield than a short-term, tax-free investment
and can accept moderate risk to their principal.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. The fund's focus on intermediate-term
bonds should reduce the effect of this risk somewhat, but will not eliminate it.
Changes in interest rates will also affect the fund's yield: when rates fall,
fund yield tends to fall as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may focus on investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could invest in illiquid municipal lease
obligations, which are more likely to default or to become difficult to sell
because they carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o political or legal actions could change the way the fund's dividends are
taxed
3 | Scudder Medium Term Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns of the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions.
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
6.29 12.13 8.93 10.94 -3.50 14.32 4.02 7.69 5.58 -1.11
--------------------------------------------------------------------------------
`90 `91 `92 `93 `94 `95 `96 `97 `98 `99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 2.92%
Best Quarter: 5.09%, Q1 1995 Worst Quarter: -4.02%, Q1 1994
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class S* -1.11 5.98 6.39
--------------------------------------------------------------------------------
Index -2.06 6.91 6.89
--------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States. Generally, the Index's average
maturity is longer than the fund's, meaning that the Index is generally more
volatile than the fund.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance.
In both the chart and the table, total returns for 1990 through 1999 would have
been lower if operating expenses hadn't been reduced.
4 | Scudder Medium Term Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.59%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.15%
-------------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses 0.74%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.15%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective July 31, 2000.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. This expense example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$76 $237 $411 $918
--------------------------------------------------------------------------------
5 | Scudder Medium Term Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SHYTX fund number | Class AARP 108
| Class S 008
Scudder High Yield Tax Free Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks to provide a high level of income exempt from regular federal
income tax. It does this by investing at least 80% of net assets in securities
of municipalities across the United States and in other securities whose income
is free from regular federal income tax and alternative minimum tax (AMT).
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes), as well as municipal lease obligations and investments
representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks, shifts in the
yield curve and possible interest rate movements to changes in supply and demand
within the municipal bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
10 and 13 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Credit Quality Policies
This fund normally invests at least 50% of total assets in municipal securities
of the top four grades of credit quality.
The fund could put up to 50% of total assets in high yield bonds of the fifth
and sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, high yield bonds generally pay higher yields than below investment-grade
bonds and have higher volatility and higher risk of default on payments of
interest or principal.
--------------------------------------------------------------------------------
6 | Scudder High Yield Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may be appropriate for individuals in a moderate to high tax
bracket who are willing to accept risk to their principal in exchange
for the potential for high current income.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
One main factor is credit quality. Because the issuers of high yield municipal
bonds may be in uncertain financial health, the prices of these bonds can be
vulnerable to bad fiscal, political, or economic news. In some cases, bonds may
decline in credit quality or go into default. To the extent that the fund
focuses on certain geographic regions or sectors it increases these risks. For
example, the fund could invest in illiquid municipal lease obligations, which
are more likely to default or to become difficult to sell because they carry
limited credit backing. Credit risks are greater for junk bonds than for
investment-grade bonds.
A rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's dollar-weighted
average maturity could make it more sensitive to this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some types of bonds could be paid off earlier than expected, which would
hurt the fund's performance
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them; this risk may be greater for high
yield bonds than for investment-grade bonds
o political or legal actions could change the way the fund's dividends are
taxed
7 | Scudder High Yield Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to year by
year and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions.
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
6.02 13.46 10.88 13.85 -8.38 19.28 4.43 12.04 6.38 -2.23
--------------------------------------------------------------------------------
`90 `91 `92 `93 `94 `95 `96 `97 `98 `99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 3.34%
Best Quarter: 8.46%, Q1 1995 Worst Quarter: -6.37%, Q1 1994
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class S* -2.23 7.74 7.28
--------------------------------------------------------------------------------
Index -2.06 6.91 6.89
--------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance.
In both the chart and the table, total returns from 1990 through 1999 would have
been lower if operating expenses hadn't been reduced.
8 | Scudder High Yield Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.64%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.25%
-------------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses 0.74%
--------------------------------------------------------------------------------
* The adviser will cap total annual operating expenses voluntarily at 0.79%.
This cap may be terminated at any time at the option of the adviser.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. This expense example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$91 $284 $493 $1,096
--------------------------------------------------------------------------------
9 | Scudder High Yield Tax Free Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder approval.
However, the policy of investing at least 80% of net assets in municipal
securities for each fund cannot be changed without shareholder approval.
o As a temporary defensive measure, each fund could shift up to 100% of its
assets into investments such as money market securities. This could prevent
losses, but would mean that the fund was not pursuing its goal.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality declines, the security will
usually be sold unless the adviser believes this would not be in the
shareholders' best interests.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
10 | Other Policies and Risks
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the funds, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of each
fund's average daily net assets.
Fund Name Fee Paid
--------------------------------------------------------------------------------
Scudder Medium Term Tax Free Fund 0.59%
--------------------------------------------------------------------------------
Scudder High Yield Tax Free Fund 0.64%
--------------------------------------------------------------------------------
11 | Other Policies and Risks
<PAGE>
Each fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the new fee rates for each fund and the effective
date of these agreements.
--------------------------------------------------------------------------------
Investment Management Fee
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
Scudder Medium Term Tax Free Fund (as of July 31, 2000)
--------------------------------------------------------------------------------
first $500 million 0.60%
--------------------------------------------------------------------------------
next $500 million 0.50%
--------------------------------------------------------------------------------
more than $1 billion 0.475%
--------------------------------------------------------------------------------
Scudder High Yield Tax Free Fund (as of October 2, 2000)
--------------------------------------------------------------------------------
first $300 million 0.65%
--------------------------------------------------------------------------------
next $200 million 0.60%
--------------------------------------------------------------------------------
more than $500 million 0.575%
--------------------------------------------------------------------------------
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for services relating to investments by AARP members in AARP Class shares of
each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of the AARP Classes of all funds managed by Scudder Kemper.
The fee rates, which decrease as the aggregate net assets of the AARP Classes
become larger, are as follows: 0.07% for the first $6 billion in net assets,
0.06% for the next $10 billion and 0.05% thereafter.
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder Medium Term Scudder High Yield
Tax Free Fund Tax Free Fund
Ashton P. Goodfield Philip G. Condon
Co-Lead Portfolio Manager Lead Portfolio Manager
o Began investment career in 1986 o Began investment career
o Joined the adviser in 1986 in 1978
o Joined the fund team in 1990 o Joined the adviser in 1983
o Joined the fund team in 1987
Philip G. Condon
Co-Lead Portfolio Manager Rebecca L. Wilson
o Began investment career in 1978 o Began investment career
o Joined the adviser in 1983 in 1986
o Joined the fund team in 1998 o Joined the adviser in 1986
o Joined the fund team
in 1998
The Board
12 | Who Manages and Oversees the Funds
<PAGE>
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders.
The following people comprise each fund's Board.
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder o President, Doris Duke
Kemper Investments, Inc. Charitable Foundation
o President of each fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President, WGBH Educational
Foundation Jean C. Tempel
o Managing Director, First
Dawn-Marie Driscoll Light Capital, LLC (venture
o Executive Fellow, Center for capital firm)
Business Ethics, Bentley College
o President, Driscoll Associates Steven Zaleznick
(consulting firm) o President and Chief
Executive Officer, AARP
Edgar Fiedler Services, Inc.
o Senior Fellow and Economic
Counsellor, The Conference
Board, Inc. (not-for-profit
business research organization)
Keith R. Fox
o General Partner, The Exeter
Group of Funds
13 | Who Manages and Oversees the Funds
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Effective July 31, 2000 shares of Scudder Medium Term Tax Free Fund were
redesignated as Class S. Because Class AARP shares are available beginning
October 2, 2000, there is no financial data for these shares as of the date of
this prospectus.
Scudder Medium Term Tax Free Fund -- Class S
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000(a) 1999(b) 1998(c) 1997(c) 1996(c) 1995(c)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $11.26 $11.48 $11.41 $11.15 $11.26 $10.39
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income .52 .21 .52 .52 .53 .54
-------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on investment
transactions (.54) (.21) .11 .31 (.09) .92
------------------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment (.02) -- .63 .83 .44 1.46
operations
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment income (.52) (.21) (.52) (.52) (.53) (.54)
-------------------------------------------------------------------------------------
Net realized gains on
investment
transactions (.04) (.01) (.04) (.05) (.02) (.05)
------------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.56) (.22) (.56) (.57) (.55) (.59)
-------------------------------------------------------------------------------------
Net asset value, end
of period $10.68 $11.26 $11.48 $11.41 $11.15 $11.26
------------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (.20) (.02)** 5.58 7.69 4.02 14.32(d)
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 522 643 678 657 651 712
-------------------------------------------------------------------------------------
Ratio of expenses
before expense
reductions (%) .74(e) .72* .72 .74 .72 .72
-------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .73(e) .72* .72 .74 .72 .70
-------------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 4.77 4.49* 4.51 4.67 4.75 4.92
-------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 21 13* 11 13 14 36
-------------------------------------------------------------------------------------
</TABLE>
(a) For the year ended May 31, 2000.
(b) For the five months ended May 31, 1999. On August 10, 1998, the Board of
Trustees of the Trust changed the fiscal year end of the Fund from December
31 to May 31.
(c) For the year ended December 31.
(d) Total returns may have been lower had certain expenses not been reduced.
(e) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .72% and
.72%, respectively (see Financial Statements).
* Annualized
** Not annualized
14 | Financial Highlights
<PAGE>
Scudder High Yield Tax Free Fund-- Class S (a)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000(b) 1999(c) 1998(d) 1997(d) 1996(d) 1995(d)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.69 $12.93 $12.78 $12.04 $12.19 $10.86
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income .66 .26 .65 .67 .66 .68
-------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.82) (.24) .15 .74 (.15) 1.37
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment
operations (.16) .02 .80 1.41 .51 2.05
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.66) (.26) (.65) (.67) (.66) (.72)
-------------------------------------------------------------------------------------
Net asset value, end
of period $11.87 $12.69 $12.93 $12.78 $12.04 $12.19
-----------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (1.28) .18** 6.38 12.04 4.43(e) 19.28(e)
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of 436 450 432 337 293 304
period ($ millions)
-------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) .89(f) .83* .84 .90 .95 .94
-------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .87(f) .83* .84 .90 .91 .80
-------------------------------------------------------------------------------------
Ratio of net investment
income (%) 5.42 4.91* 5.03 5.43 5.59 5.77
-------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 62 7* 14 33 22 27
-------------------------------------------------------------------------------------
</TABLE>
(a) On May 1, 2000 existing shares of the Fund were designated as Class S
shares.
(b) For the year ended May 31, 2000.
(c) For the five months ended May 31, 1999. On August 10, 1998, the Board of
Trustees of the Trust changed the fiscal year end of the Fund from December
31 to May 31.
(d) For the year ended December 31.
(e) Total returns would have been lower had certain expenses not been reduced.
(f) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .86% and
.85%, respectively (see Financial Statements).
* Annualized
** Not annualized
15 | Financial Highlights
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
As noted earlier, there are two classes of shares of each fund available through
this prospectus. The instructions for buying and selling each class are slightly
different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are followed
by instructions for buying and selling Class S shares. Be sure to use the
appropriate table when placing any orders to buy, exchange or sell shares in
your account.
<PAGE>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $50 or more with an Automatic
accounts Investment Plan, Payroll
$500 or more for IRAs Deduction or Direct Deposit
------------------------------------------------------------------------------------
By mail o For enrollment forms, call Send a personalized investment
1-800-253-2277 slip or short note that
o Fill out and sign an includes:
enrollment form o fund and class name
o Send it to us at the o account number
appropriate address, along o check payable to "The AARP
with an investment check Investment Program"
------------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information o To set up regular investments
investment plan required on your enrollment from a bank checking account,
form and include a voided call 1-800-253-2277 (minimum
check $50)
------------------------------------------------------------------------------------
Payroll Deduction o Select either of these o Once you specify a dollar
or Direct Deposit options on your enrollment amount (minimum $50),
form and submit it. You will investments are automatic.
receive further instructions
by mail.
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
------------------------------------------------------------------------------------
On the Internet o Go to "services and forms-- o Call 1-800-253-2277 to ensure
How to Open an Account" at you have electronic services
aarp.scudder.com o Register at aarp.scudder.com
o Print out a prospectus and an o Follow the instructions for
enrollment form buying shares with money from
o Complete and return the your bank account
enrollment form with your
check
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The AARP Investment Program, PO Box 2540, Boston, MA 02208-2540
Express, registered or certified mail:
The AARP Investment Program, 66 Brooks Drive, Braintree, MA
02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
17 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP Exchanging into another fund Selling shares
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 or more for IRAs) most for over $100,000, can
only be ordered in writing; if
you're in doubt, see page 23
------------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
Using Easy-Access o Call 1-800- 631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
------------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page)
o your account number o your account number
o names of the funds, class and o names of the funds, class
number of shares or dollar number of shares or dollar
amount you want to exchange amount you want to redeem
------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account,
call 1-800-253-2277
--------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
------------------------------------------------------------------------------------
On the Internet o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for
making on-line exchanges
------------------------------------------------------------------------------------
Using -- o On Scudder Medium Term Tax
Checkwriting Free Fund only; call
1-800-253-2277
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Services For Class AARP Investors
---------------------------------------------------------------------------------------
<S> <C>
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m. EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Services for o AARP Lump Sum Service For planning and setting up a lump
participants: sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs.
o AARP Goal Setting and Asset Allocation Service For allocating
assets and measuring investment progress.
o For more information, please call 1-800-253-2277.
---------------------------------------------------------------------------------------
</TABLE>
18 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
------------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address, along
with an investment check o account number
o check payable to "The Scudder
Funds"
------------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include from a bank checking account,
a voided check call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudder.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application
o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
19 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
you're in doubt, see page 23
$100 or more for exchanges
between existing accounts
------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
------------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and account o the fund, class and account
number you're exchanging out of number from which you want to
sell shares
o the dollar amount or number
of shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the
fund you want to exchange into o your name(s), signature(s)
and address, as they appear
o your name(s), signature(s), on your account
and address, as they appear on
your account o a daytime telephone number
o a daytime telephone number
------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
------------------------------------------------------------------------------------
Using Checkwriting -- o On Scudder Medium Term Tax
Free Fund only; call
1-800-SCUDDER
------------------------------------------------------------------------------------
</TABLE>
20 | How to Buy, Sell and Exchange Class AARP Shares
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m.
and 8 p.m. Eastern time on any fund business day by calling
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the funds' Class AARP and Class S shares. Scudder High Yield Tax Free
Fund does have other share classes, which are described in a separate prospectus
and which have different fees, requirements, and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
21 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or
even place orders for exchanges, go to aarp.scudder.com (Class AARP)
or www.scudder.com (Class S).
--------------------------------------------------------------------------------
Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. However, wire transactions that arrive by
12:00 noon eastern time will receive that day's dividend.
When selling shares, you'll generally receive the dividend for the day on which
your shares were sold.
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP shares
--------------------------------------------------------------------------------
Call Easy-Access Line, the AARP Investment Program Automated Information
Line, at 1-800-631-4636
--------------------------------------------------------------------------------
For Class S shares
--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
Checkwriting, available on Scudder Medium Term Tax Free Fund, lets you sell
shares of that fund by writing a check. Your investment keeps earning dividends
until your check clears. Please note that you should not write checks for less
than $100, and that we can't honor any check larger than your balance at the
time the check is presented to us. It's not a good idea to close out an account
using a check because the account balance could change between the time you
write the check and the time it is presented.
22 | Policies You Should Know About
<PAGE>
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share prices
For each share class, the price at which you buy shares is the net asset value
per share, or NAV. To calculate NAV, each share class of each fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
23 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o for Class AARP and Class S shareholders, close your account and send you
the proceeds if your balance falls below $1,000; for Class S shareholders,
charge you $10 a year if your account balance falls below $2,500; in either
case, we will give you 60 days notice so you can either increase your
balance or close your account (these policies don't apply to retirement
accounts, to investors with $100,000 or more in Scudder fund shares or in
any case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; generally, the fund won't make a redemption
in kind unless your requests over a 90-day period total more than $250,000
or 1% of the value of the fund's net assets
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
24 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds have a regular schedule for paying out any earnings to shareholders:
o Income dividends: declared daily and paid monthly
o Short-term and long-term capital gains: November or December, or otherwise
as needed
You can choose how to receive your dividends and capital gains. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and capital gains distributions will all be reinvested. For
retirement plans, reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
Dividends from these funds are generally free from federal income tax for most
shareholders. However, there are a few exceptions:
o a portion of a fund's dividends may be taxable as ordinary income if it
came from investments in taxable securities
o because each fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may owe
taxes on a portion of your dividends if you are among those investors who
must pay AMT
25 | Understanding Distributions and Taxes
<PAGE>
The following tables show the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the funds:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Each fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
26 | Understanding Distributions and Taxes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call 1-800-253-2277 (Class
AARP) or 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder. Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment Program
from Scudder Scudder Funds SEC
PO Box 2540 Boston, MA PO Box 2291 Boston, MA 450 Fifth Street,
02208-2540 02107-2291 N.W. Washington, D.C.
1-800-253-2277 1-800-SCUDDER 20549-0102
aarp.scudder.com www.scudder.com 1-202-942-8090
www.sec.gov
Fund Name SEC File #
--------------------------------------------------------------------------------
Scudder Medium Term Tax Free Fund 811-3632
--------------------------------------------------------------------------------
Scudder High Yield Tax Free Fund 811-2671
--------------------------------------------------------------------------------
<PAGE>
SCUDDER
INVESTMENTS(SM)
[LOGO]
October 1, 2000
Prospectus
SCUDDER HIGH YIELD TAX FREE FUND
Advisor Classes A, B, and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder High Yield Tax Free Fund
How the fund works
2 Investment Approach
3 Main Risk to Investors
4 The Fund's Track Record
5 How Much Investors Pay
6 Other Policies and Risks
7 Who Manages and Oversees the Fund
How to invest in the fund
13 Choosing a Share Class
18 How to Buy Shares
19 How to Exchange or Sell Shares
20 Policies You Should Know About
25 Understanding Distributions and Taxes
<PAGE>
How the fund works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class A: NOTAX
| Class B: NOTBX
| Class C: NOTCX
Scudder High Yield Tax Free Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks to provide a high level of income exempt from regular federal
income tax. It does this by investing at least 80% of net assets in securities
of municipalities across the United States and in other securities whose income
is free from regular federal income tax and alternative minimum tax (AMT).
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes), as well as municipal lease obligations and investments
representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks, shifts in the
yield curve, and possible interest rate movements to changes in supply and
demand within the municipal bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
10 and 13 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 50% of total assets in municipal securities
of the top four grades of credit quality.
The fund could put up to 50% of total assets in high yield bonds of the fifth
and sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, high yield bonds generally pay higher yields than below investment-grade
bonds and have higher volatility and higher risk of default on payments of
interest or principal.
2
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may be appropriate for individuals in a moderate to high tax
bracket who are willing to accept risk to their principal in exchange
for the potential for high current income.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
One main factor is credit quality. Because the issuers of high yield municipal
bonds may be in uncertain financial health, the prices of these bonds can be
vulnerable to bad fiscal, political or economic news. In some cases, bonds may
decline in credit quality or go into default. To the extent that the fund
emphasizes certain geographic regions or sectors it increases these risks. For
example, the fund could invest in illiquid municipal lease obligations, which
are more likely to default or to become difficult to sell because they carry
limited credit backing. Credit risks are greater for junk bonds than for
investment-grade bonds.
A rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's dollar-weighted
average maturity could make it more sensitive to this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality or other matters
o some types of bonds could be paid off earlier than expected, which
would hurt the fund's performance
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them; this risk may be
greater for high yield bonds than for investment-grade bonds
o political or legal actions could change the way the fund's dividends
are taxed
3
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 6.02
'91 13.46
'92 10.88
'93 13.85
'94 -8.38
'95 19.28
'96 4.43
'97 12.04
'98 6.38
'99 -2.23
2000 Total Return as of June 30: 3.34%
Best Quarter: 8.46%, Q1 1995 Worst Quarter: -6.37%, Q1 1994
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class S -2.23 7.74 7.28
------------------------------------------------------------------------
Index -2.06 6.91 6.89
------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
Performance for Classes A, B and C shares is not provided because these classes
do not have a full calendar year of performance. Although Class S shares are not
offered in this prospectus, they are invested in the same portfolio. Class S
shares' annual returns differ to the extent that the classes have different fees
and expenses.
In both the chart and the table, total returns from 1990 through 1999 would have
been lower if operating expenses hadn't been reduced.
4
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
-----------------------------------------------------------------------------
Fee Table Class A Class B Class C
-----------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
-----------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 4.50% None None
-----------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a % of redemption proceeds) None* 4.00% 1.00%
-----------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
-----------------------------------------------------------------------------
Management Fee 0.64% 0.64% 0.64%
-----------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75% 0.75%
-----------------------------------------------------------------------------
Other Expenses 0.43% 0.42% 0.41%
---------------------------------
-----------------------------------------------------------------------------
Total Annual Operating Expenses** 1.07% 1.81% 1.80%
-----------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50%
if redeemed during the second year following purchase.
** The adviser will cap total annual operating expenses voluntarily at
0.80%, 1.60% and 1.58% for Class A, B and C shares, respectively. These
caps may be terminated at any time at the option of the adviser.
------------------------------------------------------------------------
Expense Example
------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This expense example assumes the
expenses above remain the same. It also assumes that you invested $10,000,
earned 5% annual returns, and reinvested all dividends and distributions. This
is only an example; actual expenses will be different.
------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------
Class A shares $554 $775 $1,014 $1,697
------------------------------------------------------------------------
Class B shares 584 869 1,180 1,754
------------------------------------------------------------------------
Class C shares 283 566 975 2,116
------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------
Class A shares $554 $775 $1,014 $1,697
------------------------------------------------------------------------
Class B shares 184 569 980 1,754
------------------------------------------------------------------------
Class C shares 183 566 975 2,116
------------------------------------------------------------------------
5
<PAGE>
Other Policies and Risks
While the previous pages describe the main points of the fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
However, the policy of investing at least 80% of net assets in
municipal securities cannot be changed without shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of
assets into investments such as taxable money market securities. This
could prevent losses, but would mean that the fund would not be
pursuing its goal.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality declines, the security will
usually be sold unless the adviser believes this would not be in the
shareholders' best interests.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
6
<PAGE>
--------------------------------------------------------------------------------
[ICON] The fund is managed by a team of investment professionals who work
together to develop the fund's investment strategies.
--------------------------------------------------------------------------------
Who Manages and Oversees the Fund
The investment adviser
The fund's investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee. For the 12 months through the most recent fiscal year end, the
actual amount the fund paid in management fees was 0.64% of the fund's average
daily net assets.
The fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the new fee rates for the fund.
---------------------------------------------------------------------------
Investment Management Fee
---------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------
Scudder High Yield Tax Free Fund
--------------------------------------------------------------------------
first $300 million 0.65%
--------------------------------------------------------------------------
next $200 million 0.60%
--------------------------------------------------------------------------
more than $500 million 0.575%
--------------------------------------------------------------------------
7
<PAGE>
The portfolio managers
Below are the people who handle the fund's day-to-day management:
Philip G. Condon Rebecca L. Wilson
Lead Portfolio Manager o Began investment career in 1986
o Began investment career o Joined the advisor in 1986
in 1978 o Joined the fund team in 1998
o Joined the advisor in 1983
o Joined the fund team in 1987
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that the fund is
managed in the best interests of its shareholders.
The following people comprise the fund's Board.
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder o President, Doris Duke
Kemper Investments, Inc. Charitable Foundation
o President of the fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President, WGBH Educational
Foundation Jean C. Tempel
o Managing Director, First
Dawn-Marie Driscoll Light Capital, LLC (venture
o Executive Fellow, Center for capital firm)
Business Ethics, Bentley
College Steven Zaleznick
o President, Driscoll o President and Chief Executive
Associates (consulting firm) Officer, AARP Services, Inc.
Edgar Fiedler
o Senior Fellow and Economic
Counsellor, The Conference
Board, Inc. (not-for-profit
business research
organization)
Keith R. Fox
o General Partner, The Exeter
Group of Funds
8
<PAGE>
Financial Highlights
These tables are designed to help you understand the fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in the class
would have earned (or lost), assuming all dividends and distributions were
reinvested. This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the fund's financial statements, is included in the
fund's annual report (see "Shareholder reports" on the back cover).
Scudder High Yield Tax Free Fund-- Class A
------------------------------------------------------------------------------
2000(a)
------------------------------------------------------------------------------
Net asset value, beginning of period $12.02
------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------
Net investment income .06
------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.16)
---------
------------------------------------------------------------------------------
Total from investment operations (.10) Less distributions from:
------------------------------------------------------------------------------
Net investment income (.06)
------------------------------------------------------------------------------
Net asset value, end of period $11.86
---------
------------------------------------------------------------------------------
Total Return (%)(b)(c) (.77)
------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 246
------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .11**
------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .07**
------------------------------------------------------------------------------
Ratio of net investment income (%) .52**
------------------------------------------------------------------------------
Portfolio turnover rate (%) 62
------------------------------------------------------------------------------
(a) For the period May 1, 2000 (commencement of sales of Class A shares) to
May 31, 2000.
(b) Total return would have been lower had certain expenses not been
reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
9
<PAGE>
Scudder High Yield Tax Free Fund -- Class B
-------------------------------------------------------------------------------
2000(a)
-------------------------------------------------------------------------------
Net asset value, beginning of period $12.02
-------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------
Net investment income .05
-------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.16)
---------
-------------------------------------------------------------------------------
Total from investment operations (.11) Less distributions from:
-------------------------------------------------------------------------------
Net investment income (.05)
-------------------------------------------------------------------------------
Net asset value, end of period $11.86
---------
-------------------------------------------------------------------------------
Total Return (%)(b)(c) (.92)
-------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 209
-------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .19**
-------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .14**
-------------------------------------------------------------------------------
Ratio of net investment income (%) .45**
-------------------------------------------------------------------------------
Portfolio turnover rate (%) 62
-------------------------------------------------------------------------------
(a) For the period May 1, 2000 (commencement of sales of Class B shares) to
May 31, 2000.
(b) Total return would have been lower had certain expenses not been
reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
10
<PAGE>
Scudder High Yield Tax Free Fund-- Class C
-------------------------------------------------------------------------------
2000(a)
-------------------------------------------------------------------------------
Net asset value, beginning of period $12.02
-------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------
Net investment income .05
------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.16)
---------
------------------------------------------------------------------------------
Total from investment operations (.11) Less distributions from:
------------------------------------------------------------------------------
Net investment income (.05)
------------------------------------------------------------------------------
Net asset value, end of period $11.86
---------
------------------------------------------------------------------------------
Total Return (%)(b)(c) (.92)
------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 36
------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .20**
------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .14**
------------------------------------------------------------------------------
Ratio of net investment income (%) .45**
------------------------------------------------------------------------------
Portfolio turnover rate (%) 62
------------------------------------------------------------------------------
(a) For the period May 1, 2000 (commencement of sales of Class C shares) to
May 31, 2000.
(b) Total return would have been lower had certain expenses not been
reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
11
<PAGE>
How to invest in the fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing a Share Class
This fund offers five classes of shares. Offered in this prospectus are three
share classes for the fund. The fund offers two additional classes of shares
separately. Each class has its own fees and expenses, offering you a choice of
cost structures. Class A, Class B and Class C shares are intended for investors
seeking the advice and assistance of a financial representative, who may receive
compensation for those services through sales commissions, service fees and/or
distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Classes and features Points to help you compare
----------------------------------------------------------------------------------------
<S> <C> <C>
Class A o Sales charges of up to 4.50%, o Some investors may be able to
charged when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no charges
when you sell shares o Total annual operating
expenses are lower than those
o No distribution fee for Class B or Class C
----------------------------------------------------------------------------------------
Class B o No charges when you buy shares o The deferred sales charge
rate falls to zero after six
o Deferred sales charge years
declining from 4.00%, charged
when you sell shares you bought o Shares automatically convert
within the last six years to Class A after six years,
which means lower annual
o 0.75% distribution fee expenses going forward
----------------------------------------------------------------------------------------
Class C o No charges when you buy shares o The deferred sales charge
rate is lower, but your shares
o Deferred sales charge of never convert to Class A, so
1.00%, charged when you sell annual expenses remain higher
shares you bought within the
last year
o 0.75% distribution fee
----------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class A shares may make sense for long-term investors, especially those
who are eligible for reduced or eliminated sales charges.
--------------------------------------------------------------------------------
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge as a Sales charge as % of
Your investment % of offering price your net investment
------------------------------------------------------------------------
Less than $100,000 4.50 4.71
------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
------------------------------------------------------------------------
$1 million or more See below and next page
------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $100,000 over the next 24 months ("letter
of intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $100,000
("cumulative discount")
o you are investing a total of $100,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
14
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a
fee to an investment advisor or other firm for portfolio management
services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Shareholder Services
can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Shareholder Services can answer your questions and help you
determine if you're eligible.
15
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class B shares can be a logical choice for long-term investors who
would prefer to see all of their investment go to work right away, and
can accept somewhat higher annual expenses in exchange.
--------------------------------------------------------------------------------
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan under which a distribution fee of 0.75% is deducted
from fund assets during each of the first six years. This means the annual
expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares, which don't have a 12b-1 fee.
After six years, Class B shares automatically convert to Class A, which has the
net effect of lowering the annual expenses from the seventh year on. However,
unlike Class A shares, your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
------------------------------------------------------------------------
First year 4.00%
------------------------------------------------------------------------
Second or third year 3.00
------------------------------------------------------------------------
Fourth or fifth year 2.00
------------------------------------------------------------------------
Sixth year 1.00
------------------------------------------------------------------------
Seventh year and later None (automatic conversion to
Class A)
------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Shareholder Services can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
16
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class C shares may appeal to investors who plan to sell some or all
shares within six years of buying them, or who aren't certain of their
investment time horizon.
--------------------------------------------------------------------------------
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% is
deducted from fund assets each year. Because of this fee, the annual expenses
for Class C shares are similar to those of Class B shares, but higher than those
for Class A shares (and the performance of Class C shares is correspondingly
lower than that of Class A). However, unlike Class A shares, your entire
investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
------------------------------------------------------------------------
First year 1.00%
------------------------------------------------------------------------
Second year and later None
------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Shareholder Services can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
17
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
First investment Additional investments
---------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $100 or more for regular
accounts accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan, Payroll
Deduction or Direct Deposit
---------------------------------------------------------------------------------------
Through a o Contact your representative o Contact your representative
financial using the method that's most using the method that's most
representative convenient for you convenient for you
---------------------------------------------------------------------------------------
By mail or o Fill out and sign an o Send a check made out to
express mail (see application "Kemper Funds" and a Kemper
below) Investment slip to us at the
o Send it to us at the appropriate address below
appropriate address, along
with an investment check o If you don't have an
investment slip, simply include
a letter with your name,
account number, the full name
of the fund and the share class
and your investment instructions
---------------------------------------------------------------------------------------
By wire o Call (800) 621-1048 for o Call (800) 621-1048 for
instructions instructions
---------------------------------------------------------------------------------------
By phone -- o Call (800) 621-1048 for
instructions
---------------------------------------------------------------------------------------
With an automatic -- o To set up regular investments
investment plan from a bank checking account,
call (800) 621-1048 (minimum
$50)
---------------------------------------------------------------------------------------
On the Internet -- o Go to www.kemper.com and
register
o Follow the instructions for
buying shares with money from
your bank account
---------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO
64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
--------------------------------------------------------------------------------
18
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
----------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account most for over $50,000, can only
be ordered in writing with a
$100 or more for exchanges signature guarantee; if you're
between existing accounts in doubt, see page 21
----------------------------------------------------------------------------------------
Through a o Contact your representative o Contact your representative
financial by the method that's most by the method that's most
representative convenient for you convenient for you
----------------------------------------------------------------------------------------
By phone or wire o Call (800) 621-1048 for o Call (800) 621-1048 for
instructions instructions
----------------------------------------------------------------------------------------
By mail, express Write a letter that includes: Write a letter that includes:
mail or fax
(see previous o the fund, class and account o the fund, class and account
page) number you're exchanging out number from which you want to
of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s)
fund you want to exchange into and address as they appear on
your account
o your name(s), signature(s)
and address as they appear on o a daytime telephone number
your account
o a daytime telephone number
----------------------------------------------------------------------------------------
With a systematic o To set up regular exchanges --
exchange plan from a fund account, call
(800) 621-1048
----------------------------------------------------------------------------------------
With a systematic -- o To set up regular cash
withdrawal plan payments from a fund account,
call (800) 621-1048
----------------------------------------------------------------------------------------
On the Internet o Go to www.kemper.com and --
register
o Follow the instructions for
making on-line exchanges
----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 3 p.m. Central time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. When selling shares, you'll generally receive
the dividend for the day on which your shares were sold. The level of income
dividends will vary from one class to another based on a class's fees and
expenses.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use KemperACCESS to get information on funds
generally and on accounts held directly at Kemper. You can also use it to make
exchanges and sell shares.
20
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Kemper Web site can be a valuable resource for shareholders with
Internet access. Go to www.kemper.com to get up-to-date information,
review balances or even place orders for exchanges, purchases and
redemptions.
--------------------------------------------------------------------------------
EXPRESS-Transfer lets you set up a link between a Kemper or Scudder account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
When you call us to sell shares, we may record the call, ask you for certain
information or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $1,000 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
When you want to sell more than $50,000 worth of shares, or send the proceeds to
a third party or to a new address, you'll usually need to place your order in
writing and include a signature guarantee. The only exception is if you want
money wired to a bank account that is already on file with us; in that case, you
don't need a signature guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
21
<PAGE>
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns
of excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of
the investment notifies Kemper Distributors that the dealer waives the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Shareholder Services can answer your questions and help you determine if you are
eligible.
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature you can put
your money back into the same class of a Scudder or Kemper fund at its current
NAV, and for purposes of sales charges it will be treated as if it had never
left Scudder or Kemper. You'll be reimbursed (in the form of fund shares) for
any CDSC you paid when you sold. Future CDSC calculations will be based on your
original investment date, rather than your reinstatement date. There is also an
option that lets investors who sold Class B shares buy Class A shares with no
sales charge, although they won't be reimbursed for any CDSC they paid. You can
only use the reinstatement feature once for any given group of shares. To take
advantage of this feature, contact Shareholder Services or your financial
representative.
22
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
How the fund calculates share prices
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For the fund and each share class, the price at which you sell shares is also
the NAV, although a CDSC may be taken out of the proceeds (see "Choosing a Share
Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
23
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; generally, the fund won't make
a redemption in kind unless your requests over a 90-day period total
more than $250,000 or 1% of the value of the fund's net assets
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
24
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchases and sales of shares.) A
fund may not always pay a distribution for a given period.
The fund has a regular schedule for paying out any earnings to shareholders:
o Income dividends: declared daily and paid monthly
o Short-term and long-term capital gains: November or December, or
otherwise as needed
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you. Your
sales of shares may result in a capital gain or loss for you (except in an IRA
or other tax-advantaged account); whether long-term or short-term depends on how
long you owned the shares. For tax purposes, an exchange is the same as a sale.
<PAGE>
Dividends from the fund are generally tax free for most shareholders, meaning
that investors can receive them without incurring federal, and (in some cases)
state and local income tax liability. However, there are a few exceptions:
o a portion of the fund's dividends may be taxable as ordinary income if
it came from investments in taxable securities
o because the fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may
owe taxes on a portion of your dividends if you are among those
investors who must pay AMT
The following table shows the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the fund:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------
o taxable income dividends you receive from the fund
--------------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------
o long-term capital gains from selling fund share
--------------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------
The fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
25
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get these
reports automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder. Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials in person at the
SEC's Public Reference Room in Washington, DC or request them electronically at
[email protected].
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (202) 942-8090
Scudder Funds c/o
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
--------------------------------------------------------------------------------
SEC File Number
Scudder High Yield Tax Free Fund 811-2671
Principial Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800)621-1048
<PAGE>
SCUDDER MEDIUM TERM TAX FREE FUND
A series of Scudder Tax Free Trust
A Mutual Fund Which Seeks a High Level
of Income Free from Regular Federal Income Taxes and to
Limit Principal Fluctuation
and
SCUDDER MANAGED MUNICIPAL BONDS
A series of Scudder Municipal Trust
A Mutual Fund Which Seeks to Provide Income
Exempt from Regular Federal Income Tax While Actively Seeking to Reduce
Downside Risk as Compared with Other Tax-Free Income Funds
and
SCUDDER HIGH YIELD TAX FREE FUND
A series of Scudder Municipal Trust
A Mutual Fund Which Seeks to Provide a
High Level of Income Exempt from Regular Federal Income Tax
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Class AARP and Class S shares
October 1, 2000
--------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder Medium
Term Tax Free Fund and Scudder High Yield Tax Free Fund, and the prospectus of
Scudder Managed Municipal Bonds, each dated October 1, 2000, as amended from
time to time, a copy of which may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Reports to Shareholders of Scudder Medium Term Tax Free
Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund, each
dated May 31, 2000, are incorporated by reference and are hereby deemed to be
part of this Statement of Additional Information. They may also be obtained
without charge by calling 1-800-SCUDDER.
This Statement of Additional Information is incorporated by reference
into the prospectuses.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Page
THE FUNDS AND THEIR OBJECTIVES.......................................................................................1
General Investment Objectives and Policies of Scudder Medium Term Tax Free Fund.............................1
General Investment Objectives and Policies of Scudder Managed Municipal Bonds...............................2
General Investment Objectives and Policies of Scudder High Yield Tax Free Fund..............................3
Risk Factors................................................................................................5
Master/feeder Structure.....................................................................................6
Specialized Investment Techniques Common to the Funds.......................................................6
Investment Restrictions....................................................................................19
PURCHASES...........................................................................................................20
Additional Information About Opening An Account............................................................20
Minimum balances...........................................................................................21
Additional Information About Making Subsequent Investments.................................................21
Additional Information About Making Subsequent Investments by QuickBuy.....................................22
Checks.....................................................................................................22
Wire Transfer of Federal Funds.............................................................................22
Share Price................................................................................................23
Share Certificates.........................................................................................23
Other Information..........................................................................................23
EXCHANGES AND REDEMPTIONS...........................................................................................24
Exchanges..................................................................................................24
Redemption by Telephone....................................................................................25
Redemption By QuickSell....................................................................................25
Redemption by Mail or Fax..................................................................................26
Redemption by Checkwriting.................................................................................26
Redemption-in-Kind.........................................................................................26
Other Information..........................................................................................27
FEATURES AND SERVICES OFFERED BY THE FUNDS..........................................................................27
The No-Load Concept........................................................................................27
Internet Access............................................................................................28
Dividend and Capital Gain Distribution Options.............................................................28
Reports to Shareholders....................................................................................28
Transaction Summaries......................................................................................29
THE SCUDDER FAMILY OF FUNDS.........................................................................................29
SPECIAL PLAN ACCOUNTS...............................................................................................31
Automatic Withdrawal Plan..................................................................................31
Cash Management System-- Group Sub-Accounting Plan for Trust Accounts, Nominees and Corporations...........31
Automatic Investment Plan..................................................................................32
Uniform Transfers/Gifts to Minors Act......................................................................32
DIVIDENDS...........................................................................................................34
PERFORMANCE INFORMATION.............................................................................................34
Tax-Exempt Income vs. Taxable Income.......................................................................37
Comparison of Fund Performance.............................................................................38
ORGANIZATION OF THE FUNDS...........................................................................................38
INVESTMENT ADVISER..................................................................................................40
Administrative Fee.............................................................................................44
<PAGE>
TABLE OF CONTENTS (continued)
Page
Code of Ethics.............................................................................................45
TRUSTEES AND OFFICERS...............................................................................................45
REMUNERATION........................................................................................................49
Responsibilities of the Board-- Board and Committee Meetings...............................................49
Compensation of Officers and Trustees......................................................................50
DISTRIBUTOR.........................................................................................................51
TAXES...............................................................................................................52
PORTFOLIO TRANSACTIONS..............................................................................................55
Brokerage Commissions......................................................................................55
Portfolio Turnover.........................................................................................56
NET ASSET VALUE.....................................................................................................57
ADDITIONAL INFORMATION..............................................................................................58
Experts....................................................................................................58
Shareholder Indemnification................................................................................58
Other Information..........................................................................................61
FINANCIAL STATEMENTS................................................................................................62
Scudder Medium Term Tax Free Fund..........................................................................62
Scudder Managed Municipal Bonds............................................................................63
Scudder High Yield Tax Free Fund...........................................................................63
ii
</TABLE>
<PAGE>
iii
<PAGE>
iv
<PAGE>
THE FUNDS AND THEIR OBJECTIVES
Scudder Tax Free Trust, a Massachusetts business trust of which Scudder
Medium Term Tax Free Fund is a series, is referred to herein as "STFT." Scudder
Medium Term Tax Free Fund is referred to herein as "SMTTFF." Scudder Municipal
Trust, a Massachusetts business trust of which Scudder Managed Municipal Bonds
and Scudder High Yield Tax Free Fund are each a series, is referred to herein as
"SMT." Scudder Managed Municipal Bonds is referred to herein as "SMMB." Scudder
High Yield Tax Free Fund is referred to herein as "SHYTFF." SMTTFF, SMMB and
SHYTFF are also referred to individually as a "Fund" and jointly as "the Funds."
SMMB and SMTTFF each offer two classes of shares, Class AARP and Class S, to
provide investors with different purchase options. Each class has its own
important features and policies. Shares of Class AARP are especially designed
for members of AARP. SHYTFF offers five classes of shares: Class A, Class B,
Class C, Class AARP and Class S (only Class AARP and Class S are offered
herein).
Except as otherwise indicated, each Fund's objectives and policies are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that a Fund will achieve its objective. If there is a change in a
Fund's investment objective, shareholders should consider whether that Fund
remains an appropriate investment in light of their then current financial
position and needs.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Funds may engage (such
as short selling, hedging, etc.) or a financial instrument in which the Funds
may purchase (such as options, forward foreign currency contracts, etc.) are
meant to describe the spectrum of investments that Scudder Kemper Investments,
Inc. (the "Adviser"), in its discretion, might, but is not required to, use in
managing a Fund's portfolio assets. The Adviser may, in its discretion, at any
time employ such practice, technique or instrument for one or more funds but not
for all funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of a Fund but, to the extent employed, could from time
to time have a material impact on that Fund's performance.
General Investment Objectives and Policies of Scudder Medium Term Tax Free Fund
Scudder Medium Term Tax Free Fund, a diversified series of Scudder Tax
Free Trust, seeks to provide a high level of income free from regular federal
income taxes and to limit principal fluctuation. The Fund is designed for
investors seeking a higher level of federally tax-free income than normally
provided by tax-free money market or other short-term investments, and more
price stability than investments in long-term municipal bonds.
The Fund will invest primarily in high-grade, intermediate-term
municipal bonds. The dollar-weighted average maturity of the Fund's portfolio
generally will range between five and 10 years. Within this limitation, the Fund
may not purchase individual securities with effective maturities greater than 15
years. To the extent the Fund invests in high-grade securities, it will be
unable to avail itself of opportunities for higher income which may be available
with lower-grade investments.
All income distributed by the Fund is expected to be exempt from
regular federal income tax. Ordinarily, the Fund expects that 100% of its
portfolio securities will be in federally tax-exempt securities although a small
portion of its income may be subject to federal or AMT.
SMTTFF Investments. It is a fundamental policy, which may not be changed without
a vote of shareholders, that at least 80% of the Fund's net assets will normally
be invested in municipal securities. The municipal securities in which the Fund
may invest are debt obligations issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia and their
subdivisions, agencies and instrumentalities, the interest on which is exempt
from federal income tax. Such municipal securities include municipal notes,
which are generally used to provide short-term capital needs and have maturities
of one year or less. Municipal notes include Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes and Construction Loan Notes.
<PAGE>
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include: general obligation bonds, which are secured by the
issuer's pledge of its faith, credit and taxing power for payment of principal
and interest; revenue bonds; prerefunded bonds; industrial development and other
private activity bonds. The Fund may also invest in variable rate demand
instruments.
Although there is no current intention to do so, the Fund may invest
more than 25% of its total assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's current intention not to invest in municipal securities
whose investment income is taxable or alternative minimum tax (AMT) bonds. For
purposes of the Fund's investment limitation regarding concentration of
investments in any one industry, industrial development or other private
activity, bonds ultimately payable by companies within the same industry will be
considered as if they were issued by issuers in the same industry.
Normally, the Fund invests at least 65% of its net assets in municipal
bonds which are rated within the three highest quality rating categories of
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa and A), Standard & Poor's
Ratings Services ("S&P") or Fitch Investors Service, Inc. ("Fitch") (AAA, AA and
A) or their equivalents, or if not rated, judged by the Adviser to be of
comparable quality at the time of purchase. The Fund will not invest in any debt
security rated lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent
quality as determined by the Adviser. The Fund may, however, invest in a debt
security given a certain rating by one rating agency even though one or more of
the other agencies may rate the security lower. Securities must also meet credit
standards applied by the Adviser. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's net assets will normally be
invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
However, for temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may temporarily invest more than 20% of its assets in taxable
securities during periods, which, in the Adviser's opinion, require a defensive
position. A portion of the Fund's income may be subject to regular federal,
state and local income taxes. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, reverse repurchase agreements, municipal lease
obligations, variable rate demand instruments and when-issued or forward
delivery securities, may purchase warrants to purchase debt securities, and may
also engage in strategic transactions.
General Investment Objectives and Policies of Scudder Managed Municipal
Bonds
Scudder Managed Municipal Bonds, a diversified series of Scudder
Municipal Trust, seeks to provide income exempt from regular federal income tax
while actively seeking to reduce downside risk as compared with other tax-free
income funds. The managers use analytical tools to actively monitor the risk
profile of the portfolio as compared to comparable funds and appropriate
benchmarks and peer groups. The managers use several strategies in seeking to
reduce downside risk, including (i) typically maintaining a high level of
portfolio quality, (ii) keeping the fund's duration generally shorter than
comparable mutual funds, and (iii) primarily focusing on premium coupon bonds,
which have lower volatility in down markets than bonds selling at a discount. In
addition, Scudder Managed Municipal Bonds will not invest in securities issued
by tobacco-producing companies. The Fund may be appropriate for taxpayers who
are in a moderate to high tax bracket and who are looking for current income.
The Fund attempts to take advantage of opportunities in the market
caused by such factors as temporary yield disparities among individual issues or
classes of securities in an effort to achieve better capital performance than
that of an unmanaged portfolio of municipal bonds.
All income distributed by the Fund is expected to be exempt from
regular federal income taxes, but income may be subject to state and local
income taxes. Ordinarily, the Fund expects that 100% of its portfolio securities
2
<PAGE>
will be in federally tax-exempt securities although a small portion of its
income may be subject to federal or AMT.
SMMB Investments. It is a fundamental policy, which may not be changed without a
vote of shareholders, that at least 80% of the Fund's net assets will normally
be invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio in municipal securities. The Fund has
the flexibility to invest in municipal securities with short-, medium- and
long-term maturities.
The municipal securities in which the Fund may invest are issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their subdivisions, agencies and instrumentalities. The
interest on these securities is exempt from regular federal income tax. These
municipal securities include municipal notes, which are generally used to
provide short-term capital needs and have maturities of one year or less.
Municipal notes include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes and Construction Loan Notes.
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include: general obligation bonds, which are secured by the
issuer's pledge of its faith, credit and taxing power for payment of principal
and interest; revenue bonds; prerefunded bonds; industrial development and
pollution control bonds. The Fund may also invest in other municipal securities
such as variable rate demand instruments.
Although there is no current intention to do so, the Fund may invest
more than 25% of its total assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's 20% limitation on investing in municipal securities whose
investment income is taxable or AMT bonds and the Fund's current intention not
to invest in municipal securities whose investment income is subject to regular
federal income tax. For purposes of the Fund's investment limitation regarding
concentration of investments in any one industry, industrial development or
other private activity bonds ultimately payable by companies within the same
industry will be considered as if they were issued by issuers in the same
industry.
Normally, the Fund invests at least 65% of its net assets in securities
rated, or issued by an issuer rated, within the three highest quality rating
categories of Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their
equivalents, or if not rated, judged by the Adviser, to be of comparable quality
at the time of purchase. The Fund may invest up to 10% of its assets in debt
securities rated lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent
quality as determined by the Adviser, but will not purchase bonds rated below B
by Moody's, S&P or Fitch, or their equivalent. Securities must also meet credit
standards applied by the Adviser. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
For temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may invest more than 20% of its assets in taxable securities to meet
temporary liquidity requirements. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, municipal lease obligations, variable rate demand
instruments and when-issued or forward delivery securities, may purchase
warrants to purchase debt securities, and may also engage in strategic
transactions.
General Investment Objectives and Policies of Scudder High Yield Tax Free Fund
Scudder High Yield Tax Free Fund, a diversified series of Scudder
Municipal Trust, seeks to provide a high level of income exempt from regular
federal income tax. The Fund may be appropriate for individuals in a moderate to
high tax bracket who are willing to accept risk to their principal in exchange
for the potential for high current income.
The Fund will invest at least 50% of its total assets in municipal
bonds rated, at the time of purchase, within the four highest quality rating
categories of Moody's (Aaa, Aa, A or Baa), S&P or Fitch (AAA, AA, A or BBB), or
3
<PAGE>
their equivalents as determined by the Adviser. The Fund may invest, however, up
to 50% of its total assets in bonds rated below Baa by Moody's or below BBB by
S&P or Fitch, or not rated securities considered to be of equivalent quality.
The Fund may not invest in bonds rated below B by Moody's, S&P or Fitch, or
their equivalent. Should the rating of a portfolio security be downgraded after
being purchased by the Fund, the Adviser will determine whether it is in the
best interest of the Fund to retain or dispose of the security.
At the fiscal period ended May 31, 2000, the market value of the bonds
in the Fund's portfolio was rated as follows: 31% AAA, 5% AA, 12% A, 21% BBB and
31% not rated. The bonds are rated by Moody's, S&P, or of equivalent quality as
determined by the Adviser. A large portion of the Fund's bond holdings may trade
at substantial discounts from face value.
High quality bonds, those within the two highest quality-rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal.
Lower-grade bonds (so-called "junk bonds"), those rated below Baa by Moody's or
BBB by S&P or Fitch, involve greater price variability and a higher degree of
speculation with respect to the payment of principal and interest. Although some
have produced higher yields in the past than the investment-grade bonds in which
the Fund primarily invests, lower-grade bonds are considered to be predominantly
speculative and, therefore, carry greater risk.
For temporary defensive purposes, the Fund may vary from its investment
policies during periods when the Adviser determines that it is advisable to do
so because of conditions in the securities markets or other economic or
political conditions. During such periods the Fund may temporarily invest up to
100% of its assets in high-quality municipal securities and high-quality
short-term tax-exempt or taxable instruments. It is impossible to accurately
predict how long such alternative strategies may be utilized.
All income distributed by the Fund is expected to be exempt from
regular federal income tax. Ordinarily, the Fund expects that 100% of its
portfolio securities will be in federally tax-exempt securities although a small
portion of its income may be subject to federal or AMT.
SHYTFF Investments. It is a fundamental policy, which may not be changed without
a vote of shareholders, that at least 80% of the Fund's net assets will normally
be invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio assets in municipal securities, the
interest income from which is, in the opinion of bond counsel, free from regular
federal income tax. These municipal securities are debt obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their subdivisions, agencies and instrumentalities.
Such municipal securities include municipal notes, which are generally used to
provide short-term capital needs, and have maturities of one year or less.
Municipal notes include Tax Anticipation Notes, Revenue Anticipation Notes and
Construction Loan Notes.
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include general obligation bonds, revenue bonds, prerefunded
bonds, industrial development and pollution control bonds. General obligation
bonds and notes are secured by the issuer's pledge of its full faith, credit and
taxing power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source. The Fund may also invest in other municipal
securities such as variable rate demand instruments.
Although there is no current intention to do so, the Fund may invest
more than 25% of its total assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's 20% limitation on investing in AMT bonds and the Fund's
current intention not to invest in municipal securities whose investment income
is subject to regular federal income tax. For purposes of the Fund's investment
limitation regarding concentration of investments in any one industry,
industrial development or other private activity bonds ultimately payable by
companies within the same industry will be considered as if they were issued by
issuers in the same industry.
Under normal market conditions, the Fund expects to invest principally
in municipal securities with long-term maturities (i.e., more than 10 years).
The Fund has the flexibility, however, to invest in municipal securities with
4
<PAGE>
short- and medium-term maturities as well. The Fund may invest more than 20% of
its total assets in taxable securities to meet temporary liquidity requirements.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, municipal lease obligations, variable rate demand
instruments and when-issued or forward delivery securities and may also engage
in strategic transactions.
The Fund's distributions from interest on certain municipal securities
may be subject to the AMT depending upon investors' particular situations.
However, no more than 20% of the Fund's net assets will normally be invested in
municipal securities whose interest income, when distributed to shareholders, is
subject to the individual AMT. In addition, state and local taxes may apply,
depending on your state tax laws.
Risk Factors
High Yield, High Risk Bonds. The following applies to SMMB and SHYTFF only.
Below investment-grade debt securities (commonly referred to as "junk bonds"),
that are rated Ba and lower by Moody's and BB and lower by S&P or not rated
securities of equivalent quality, in which the Fund may invest carry a high
degree of risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid, than securities in the
higher rating categories and are considered speculative. The lower the ratings
of such debt securities, the greater their risks. See the Glossary to this
Statement of Additional Information for a more complete description of the
ratings assigned by ratings organizations and their respective characteristics.
High yield, high-risk securities are especially subject to adverse
change in general economic conditions, to changes in the financial condition of
their issuers and to price fluctuations in response to changes in interest
rates. Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have an adverse impact on the value of such
obligations. During an economic downturn or period of rising interest rates,
highly leveraged issues may experience financial stress which could adversely
affect their ability to service their principal and interest payment
obligations. Prices and yields of high yield securities will fluctuate over time
and, during periods of economic uncertainty, volatility of high yield securities
may adversely affect a Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in a Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently- issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interests of a Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
5
<PAGE>
Master/feeder Structure
The Board of Trustees of each Fund (the "Board" or the "Trustees") has
the discretion to retain the current distribution arrangement for each Fund
while investing in a master fund in a master/feeder fund structure as described
below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program
The Funds have received exemptive relief from the Securities and
Exchange Commission (`SEC"), which permits the Funds to participate in an
interfund lending program among certain investment companies advised by the
Adviser. The interfund lending program allows the participating funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions designed to ensure fair and
equitable treatment of all participating funds, including the following: (1) no
fund may borrow money through the program unless it receives a more favorable
interest rate than a rate approximating the lowest interest rate at which bank
loans would be available to any of the participating funds under a loan
agreement; and (2) no fund may lend money through the program unless it receives
a more favorable return than that available from an investment in repurchase
agreements and, to the extent applicable, money market cash sweep arrangements.
In addition, a fund may participate in the program only if and to the extent
that such participation is consistent with a fund's investment objectives and
policies (for instance, money market funds would normally participate only as
lenders and tax exempt funds only as borrowers). Interfund loans and borrowings
may extend overnight, but could have a maximum duration of seven days. Loans may
be called on one day's notice. A fund may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Funds are actually
engaged in borrowing through the interfund lending program, the Funds, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging), except that the Funds may engage in
reverse repurchase agreements and dollar rolls for any purpose.
Specialized Investment Techniques Common to the Funds
As discussed below, the following description of investments and
investment techniques is applicable to more than one of the Funds.
Municipal Securities. Municipal Securities are debt securities issued by or on
behalf of states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain funds for
various public purposes. The interest on these obligations is generally exempt
from federal income tax in the hands of most investors, except for the possible
applicability of the AMT. The two principal classifications of municipal
securities are "Notes" and "Bonds."
1. Municipal Notes. Municipal Notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
6
<PAGE>
seasonal revenues such as income, sales, use, and business taxes. Bond
Anticipation Notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction Loan
Notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds, which meet longer term capital
needs and generally have maturities of more than one year when issued, have two
principal classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected. Each Fund may invest more than 25% of its total assets in
industrial development or other private activity bonds, subject to each Fund's
fundamental investment policies, and also subject to each Fund's current
intention not to invest in municipal securities whose investment income is
taxable or AMT bonds, or in the case of SMMB and SHYTFF, subject to the Fund's
20% limitation on investing in AMT bonds. For the purposes of each Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
3. Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
7
<PAGE>
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover a Fund's original investment.
Participation interests represent undivided interests in municipal
leases, installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts. They may be variable or fixed rate.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace in which the
security trades. In addition, the Adviser will consider factors unique to
particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund.
Each Fund may purchase participation interests in municipal lease
obligations held by banks or other financial institution in all or part of
specific holdings of municipal obligations, provided the participation interest
is fully insured. Each participation is backed by an irrevocable letter of
credit or guarantee of the selling bank that the Adviser has determined meets
the prescribed quality standards of each Fund. Therefore, either the credit of
the issuer of the municipal obligation or the selling bank, or both, will meet
the quality standards of the particular Fund. A Fund has the right to sell the
participation back to the bank after seven days' notice for the full principal
amount of a Fund's interest in the municipal obligation plus accrued interest,
but only (i) as required to provide liquidity to the Fund, (ii) to maintain a
high quality investment portfolio or (iii) upon a default under the terms of the
municipal obligation. The selling bank will receive a fee from a Fund in
connection with the arrangement. Such participations provide a Fund with the
right to a pro rata undivided interest in the underlying municipal lease
obligations. In addition, such participations generally provide a Fund with the
right to demand payment, on not more than seven days' notice, of all or any part
of a Fund's participation interest in the underlying municipal lease obligation,
plus accrued interest. A Fund will not purchase participation interests unless
in the opinion of bond counsel, counsel for the issuers of such participations
or counsel selected by the Adviser, the interest from such participations is
exempt from regular federal income tax and state income tax, if applicable, for
a Fund.
4. Other Municipal Securities. There is, in addition, a variety of
hybrid and special types of municipal securities as well as numerous differences
in the security of municipal securities both within and between the two
principal classifications above.
The Funds may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Funds, or (3) to maintain
a high quality investment portfolio or (4) to maximize the Funds' yields. A bank
that issues a repurchase commitment may receive a fee from a Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that a Fund may purchase are
payable on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Funds will
determine the variable rate demand instruments that they will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
8
<PAGE>
a Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for a Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of a Fund. The Adviser will
reevaluate each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet a Fund's quality
criteria.
The interest rate of the underlying variable rate demand instruments
may change with changes in interest rates generally, but the variable rate
nature of these instruments should decrease changes in value due to interest
rate fluctuations. Accordingly, as interest rates decrease or increase, the
potential for capital gain and the risk of capital loss on the disposition of
portfolio securities are less than would be the case with a comparable portfolio
of fixed income securities. The Funds may purchase variable rate demand
instruments on which stated minimum or maximum rates, or maximum rates set by
state law, limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent it does, increases or decreases in
value of such variable rate demand notes may be somewhat greater than would be
the case without such limits. Because the adjustment of interest rates on the
variable rate demand instruments is made in relation to movements of the
applicable rate adjustment index, the variable rate demand instruments are not
comparable to long-term fixed interest rate securities. Accordingly, interest
rates on the variable rate demand instruments may be higher or lower than
current market rates for fixed rate obligations of comparable quality with
similar final maturities.
The maturity of the variable rate demand instruments held by the Funds
will ordinarily be deemed to be the longer of (1) the notice period required
before a Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
5. General Considerations. An entire issue of Municipal Securities may
be purchased by one or a small number of institutional investors such as one of
the Funds. Thus, the issue may not be said to be publicly offered. Unlike
securities which must be registered under the Securities Act of 1933, as amended
(the "1933 Act") prior to offer and sale unless an exemption from such
registration is available, municipal securities which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for municipal
securities which were not publicly offered initially.
Securities purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of municipal securities which are not General
Obligation Bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal securities whose issuers are located in the same state or
more than 25% of its total assets in municipal securities the security of which
is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; or colleges and
universities. Each Fund may invest more than 25% of its total assets in
municipal securities of one or more of the following types: public housing
authorities; general obligations of states and localities; lease rental
obligations of states and local authorities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. There could be economic, business or
political developments, which might affect all municipal securities of a similar
type. However, the Adviser believes that the most important consideration
affecting risk is the quality of particular issues of municipal securities
rather than factors affecting all, or broad classes of, municipal securities.
Tax-exempt custodial receipts. Scudder Managed Municipal Bonds may purchase
tax-exempt custodial receipts (the "Receipts") which evidence ownership in an
underlying bond that is deposited with a custodian for safekeeping. Holders of
the Receipts receive all payments of principal and interest when paid on the
bonds. Receipts can be purchased in an offering or from a financial counterparty
9
<PAGE>
(typically an investment banker). To the extent that any Receipt is illiquid, it
is subject to the Fund's limit on illiquid securities.
When-Issued or Forward Delivery Securities. The Funds may purchase securities
offered on a "when-issued" or "forward delivery" basis. When so offered, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by the purchaser to the
issuer and no interest on the when-issued or forward delivery security accrues
to the purchaser. To the extent that assets of a Fund are not invested prior to
the settlement of a purchase of securities, that Fund will earn no income;
however, it is intended that each Fund will be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, it is
intended that each Fund will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
Adviser does not believe that the net asset value or income of the portfolios
will be adversely affected by the purchase of securities on a when-issued or
forward delivery basis. Each Fund will establish with its custodian a segregated
account in which it will maintain cash or liquid assets, equal in value to
commitments for when-issued or forward delivery securities. Such segregated
securities may mature or be sold, if necessary, on or before the settlement
date. The Funds will not enter into such transactions for leverage purposes.
Stand-by Commitments. Each Fund may engage in Stand-by Commitments subject to
the limitations in the rules under the Investment Company Act of 1940, as
amended (the "1940 Act"). A Stand-by Commitment is a right acquired by a Fund,
when it purchases a municipal security from a broker, dealer or other financial
institution ("seller"), to sell up to the same principal amount of such
securities back to the seller, at that Fund's option, at a specified price.
Stand-by Commitments are also known as "puts." SMMB's and SHYTFF's investment
policies permit the acquisition of Stand-by Commitments solely to facilitate
portfolio liquidity. The exercise by a Fund of a Stand-by Commitment is subject
to the ability of the other party to fulfill its contractual commitment.
Stand-by Commitments acquired by the Funds will have the following
features: (1) they will be in writing and will be physically held by a Fund's
custodian; (2) a Fund's rights to exercise them will be unconditional and
unqualified; (3) they will be entered into only with sellers which in the
Adviser's opinion present a minimal risk of default; (4) although Stand-by
Commitments will not be transferable, municipal securities purchased subject to
such commitments may be sold to a third party at any time, even though the
commitment is outstanding; and (5) their exercise price will be (i) a Fund's
acquisition cost (excluding the cost, if any, of the Stand-by Commitment) of the
municipal securities which are subject to the commitment (excluding any accrued
interest which a Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period a Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date. Moreover, while there is little
risk of an event occurring which would make amortized cost valuation of its
portfolio securities inappropriate, if such condition developed, the securities
may, in the discretion of the Trustees, be valued on the basis of available
market information and held to maturity. Each Fund expects to refrain from
exercising a Stand-by Commitment in the event that the amount receivable upon
exercise of the Stand-by Commitment is significantly greater than the then
current market value of the underlying municipal securities in order to avoid
imposing a loss on a seller and thus jeopardizing that Fund's business
relationship with that seller.
The Funds expect that Stand-by Commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, each Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding Stand-by Commitments will not
exceed 1/2 of 1% of the value of total assets of that Fund calculated
immediately after any Stand-by Commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential
benefit of a Stand-by Commitment. Therefore, it is expected that the Funds'
Trustees will determine that Stand-by Commitments ordinarily have a "fair value"
of zero, regardless of whether any direct or indirect consideration was paid.
However, in the case of SMTTFF, if the market price of the security subject to
the Stand-by Commitment is less than the exercise price of the Stand-by
10
<PAGE>
commitment, such security will ordinarily be valued at such exercise price. When
each Fund has paid for a Stand-by Commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held.
Management of the Funds understands that the Internal Revenue Service
(the "IRS") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The IRS has
also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be
tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The IRS has subsequently announced
that it will not ordinarily issue advance ruling letters as to the identity of
the true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each of the Funds intends to take the position that it
owns any municipal obligations acquired subject to a Stand-by Commitment and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the IRS will agree with
such position in any particular case. There is no assurance that Stand-by
Commitments will be available to the Funds nor has any of the Funds assumed that
such commitments would continue to be available under all market conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or trust certificates and may be combined with other features
such as interest rate swaps. The Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
The financial institution granting the option does not provide credit
enhancement, and in the event that there is a default in the payment of
principal or interest, or downgrading of a bond to below investment grade, or a
loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-by Commitments discussed above. As with any Stand-by
Commitments acquired by a Fund, the Fund intends to take the position that it is
the owner of any municipal obligation acquired subject to a third-party put, and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the IRS will agree with
such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of tender fees and swap payments, in relation to various regulated investment
company tax provisions is unclear. However, the Adviser intends to manage the
Funds' portfolios in a manner designed to minimize any adverse impact from these
investments.
Repurchase Agreements. Each Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other issuers of obligations the Fund may purchase or to be
at least equal to that of issuers of commercial paper rated within the two
highest grades assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., a Fund) acquires a security ("obligation") and the
seller agrees, at the time of sale, to repurchase the obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities is kept at least equal to
the repurchase price on a daily basis. The repurchase price may be higher than
the purchase price, the difference being income to a Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to a Fund
together with the repurchase price upon repurchase. In either case, the income
to a Fund (which is taxable) is unrelated to the interest rate on the obligation
itself. Obligations will be physically held by the custodian or in the Federal
Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
obligation purchased by a Fund subject to a repurchase agreement as being owned
11
<PAGE>
by that Fund or as being collateral for a loan by that Fund to the seller. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the obligation before repurchase of the obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the obligation. If the court characterized the transaction as a loan
and a Fund has not perfected a security interest in the obligation, that Fund
may be required to return the obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, a Fund would
be at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the obligation, in which
case a Fund may incur a loss if the proceeds to that Fund from the sale to a
third party are less than the repurchase price. However, if the market value of
the obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund involved will direct the seller
of the obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. SMTTFF may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed upon time and price.
SMTTFF will maintain a segregated account containing cash, U.S. Government
securities and other high grade debt obligations equal in value to its
obligation in connection with outstanding reverse repurchase agreements. Reverse
repurchase agreements are borrowings subject to SMTTFF's investment restrictions
applicable to that activity. The Fund will enter into reverse repurchase
agreements only when the Adviser believes that the interest income to be earned
from the investment of the proceeds of the transaction will be greater than the
interest expense of the transaction.
Borrowing. As a matter of fundamental policy, each Fund will not borrow money,
except as permitted under the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time. While the Trustees
do not currently intend to borrow for investment leverage purposes, if such a
strategy were implemented in the future it would increase a Fund's volatility
and the risk of loss in a declining market. Borrowing by a Fund will involve
special risk considerations. Although the principal of a Fund's borrowings will
be fixed, a Fund's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the fixed-income securities in each Fund's portfolio or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limits imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a substitute for purchasing
or selling particular securities. Some Strategic Transactions may also be used
to enhance potential gain although no more than 5% of a Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
12
<PAGE>
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
13
<PAGE>
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. Each Fund
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. Each Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to each Fund's limitation on investing no
more than 15% of its net assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets, and on
securities indices, currencies and futures contracts. All calls sold by a Fund
must be "covered" (i.e., a Fund must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a Fund will receive the
option premium to help protect it against loss, a call sold by a Fund exposes
that Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require that Fund to hold a security or instrument which it
might otherwise have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. Each Fund will not sell put options if, as a result, more
than 50% of a Fund's total assets would be required to be segregated to cover
14
<PAGE>
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that a
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of that Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. Each Fund may enter into currency
15
<PAGE>
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
16
<PAGE>
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, currency, index and other 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, to protect against currency
fluctuations, 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 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. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and 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 a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and the Funds 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. Each Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. 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. The Funds 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.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate cash or liquid
assets with its custodian to the extent that obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a Fund to pay
or deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
17
<PAGE>
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require that Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate cash or liquid assets
equal to the exercise price.
Except when a Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to that Fund's obligations or to
segregate liquid assets equal to the amount of that Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by a Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, that Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by a Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and that Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash or
liquid assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted or illiquid securities" or "not
readily marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale. It is each Fund's
policy that illiquid securities (including repurchase agreements of more than
seven days duration, certain restricted securities, and other securities which
are not readily marketable) may not constitute, at the time of purchase, more
than 15% of the value of the Fund's net assets. Each Fund's Board of Trustees
has approved guidelines for use by the Adviser in determining whether a security
is illiquid.
18
<PAGE>
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; or (iii) in limited quantities after they have
been held for a specified period of time and other conditions are met pursuant
to an exemption from registration. Issuers of restricted securities may not be
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of each Fund's Board of Trustees. In reaching
liquidity decisions, the Adviser will consider the following factors: (1) the
frequency of trades and quotes for the security, (2) the number of dealers
wishing to purchase or sell the security and the number of their potential
purchasers, (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (i.e. the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Investment Restrictions
The fundamental policies of each Fund set forth below may not be
changed without the approval of a majority of the Fund's outstanding shares. As
used in this Statement of Additional Information, a "majority of the Fund's
outstanding shares" means the lesser of (1) 67% of the shares of such Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of such Fund are present in person or by proxy, or (2) more than 50% of the
outstanding shares of such Fund. Any nonfundamental policy of a Fund may be
modified by the Fund's Trustees without a vote of the Fund's shareholders.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" is
adhered to at the time an investment is made, later change in percentage
resulting from changes in the value or the total cost of a Fund's assets will
not be considered a violation of the restriction.
As a matter of fundamental policy, each Fund may not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages or
investments secured by real estate or interests therein, except
that the Fund reserves freedom of action to hold and to sell real
estate acquired as a result of the Fund's ownership of
securities;
(6) purchase physical commodities or contracts relating to physical
commodities;
(7) make loans except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
19
<PAGE>
Additionally, as a matter of fundamental policy, each Fund will:
(8) have at least 80% of its net assets invested in municipal
securities during periods of normal market conditions.
With respect to fundamental policy (8) above, each Fund, with the
exception of Scudder Managed Municipal Bonds, does not consider any investments
in municipal obligations that pay interest subject to the AMT as part of the 80%
of the fund's net assets that must be invested in municipal securities.
The Trustees have voluntarily adopted certain non-fundamental policies
and restrictions which are observed in the conduct of each Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of the shareholders. As a matter of non-fundamental policy, each Fund may not:
(a) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(b) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments, (iv)
that transactions in futures contracts and options shall not be
deemed to constitute selling securities short, and (v) that the
Fund may obtain such short-term credits as may be necessary for
the clearance of securities transactions;
(c) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its
total assets; or sell put options, if as a result, the aggregate
value of the obligations underlying such put options would exceed
50% of its total assets;
(d) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate
initial margin with respect to such futures contracts entered
into on behalf of the Fund and the premiums paid for such options
on futures contracts does not exceed 5% of the fair market value
of the Fund's total assets; provided that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(e) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of
the value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to
have no value); and
(f) lend portfolio securities in an amount greater than 5% of its
total assets.
The foregoing non-fundamental policies are in addition to policies
otherwise stated in the Prospectus or this Statement of Additional Information.
PURCHASES
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and members of their immediate
families, members of the National Association of Securities Dealers, Inc.
("NASD") and banks may, if they prefer, subscribe initially for at least $1,000
(Class AARP) and $2,500 (Class S) through Scudder Investor Services, Inc. by
letter, fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
20
<PAGE>
and banks may open an account by wire. These investors must call 1-800-SCUDDER
to get an account number. During the call the investor will be asked to indicate
the Fund name, class name, amount to be wired ($1,000 minimum for Class AARP and
$2,500 for Class S), name of bank or trust company from which the wire will be
sent, the exact registration of the new account, the tax identification number
or Social Security number, address and telephone number. The investor must then
call the bank to arrange a wire transfer to The Scudder Funds, Boston, MA 02101,
ABA Number 011000028, DDA Account 9903-5552. The investor must give the Scudder
fund name, class name, account name and the new account number. Finally, the
investor must send a completed and signed application to the Fund promptly.
Investors interested in investing in Class AARP should call 1-800-253-2277 for
further instructions.
The minimum initial purchase amount is less than $2,500 for Class S
under certain plan accounts and is $1,000 for the Class AARP.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP. For fiduciary accounts such as IRAs, and
custodial accounts such as Uniform Gift to Minor Act and Uniform Trust to Minor
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by each Fund's Board of Trustees. A shareholder may
open an account with at least $1,000 ($500 for fiduciary/custodial accounts), if
an automatic investment plan (AIP) of $100/month ($50/month for Class AARP and
fiduciary/custodial accounts) is established. Scudder group retirement plans and
certain other accounts have similar or lower minimum share balance requirements.
The Funds reserve the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S, assess an annual $10 per Fund charge (with the Fee
to be paid to the Fund) for any non-fiduciary/non-custodial
account without an automatic investment plan (AIP) in place and a
balance of less than $2,500 for Class S shareholders; and
o redeem all shares in Fund accounts below $1,000 where a reduction
in value has occurred due to a redemption, exchange or transfer
out of the account. The Fund will mail the proceeds of the
redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, the applicable Trust shall have
the authority, as agent of the shareholder, to redeem shares in the account in
order to reimburse the Fund or the principal underwriter for the loss incurred.
Net losses on such transactions which are not recovered from the purchaser will
be absorbed by the principal underwriter. Any net profit on the liquidation of
unpaid shares will accrue to the Fund.
21
<PAGE>
Investors interested in making subsequent investments in Class AARP
should call 1-800-253-2277 or 1-800-SCUDDER for Class S for further instruction.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of a Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time. Proceeds
in the amount of your purchase will be transferred from your bank checking
account two or three business days following your call. For requests received by
the close of regular trading on the Exchange, shares will be purchased at the
net asset value per share calculated at the close of trading on the day of your
call. QuickBuy requests received after the close of regular trading on the
Exchange will begin their processing and be purchased at the net asset value
calculated the following business day. If you purchase shares by QuickBuy and
redeem them within seven days of the purchase, a Fund may hold the redemption
proceeds for a period of up to seven business days. If you purchase shares and
there are insufficient funds in your bank account, the purchase will be canceled
and you will be subject to any losses or fees incurred in the transaction.
QuickBuy transactions are not available for most retirement plan accounts.
However, QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine and to discourage fraud. To the extent
that the Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Investors interested in making subsequent investments in Class AARP of
a Fund should call 1-800-253-2277 for further instruction.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, each Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by that Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, each Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
22
<PAGE>
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
per share next computed after receipt of the application in good order. Net
asset value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than the Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
There is no sales charge in connection with the purchase of shares of
any class of the Funds.
Share Certificates
Due to the desire of the Funds' management to afford ease of
redemption, certificates will not be issued to indicate ownership in a Fund.
Share certificates now in a shareholder's possession may be sent to the Funds'
Transfer Agent for cancellation and credit to such shareholder's account.
Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
All issued and outstanding shares of what were formerly AARP Funds that
were subsequently reorganized into existing Scudder Funds were simultaneously
cancelled on the books of the AARP Funds. Share certificates representing
interests in shares of the relevant AARP Fund will represent a number of shares
of Class AARP of the relevant Scudder Fund into which the AARP Fund was
reorganized. Class AARP shares of each fund will not issue certificates
representing shares in connection with the reorganization.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for a Fund's shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on a Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at a class' net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Board of Trustees and the Distributor may suspend or
terminate the offering of shares of a Fund at any time for any reason.
The "Tax Identification Number" section of the application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations, certification of exempt status) will be
returned to the investor. A Fund reserves the right, following 30 days' notice,
to redeem all shares in accounts without a correct certified Social Security or
23
<PAGE>
tax identification number. A shareholder may avoid involuntary redemption by
providing a Fund with a tax identification number during the 30-day notice
period.
Each Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder Fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other Fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new Fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder Fund to an
existing account in another Scudder Fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. Each Trust and the Transfer Agent each reserves the right to suspend
or terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder Fund is a redemption of shares and therefore
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such exchange may be subject to backup withholding. (See "TAXES").
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Funds do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Funds will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine. The Funds and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder Fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder Funds or classes of Scudder
Funds. For more information, please call 1-800-SCUDDER for Class S and
1-800-253-2277 for Class AARP.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
24
<PAGE>
Redemption by Telephone
Shareholders currently have the right automatically, without having to
elect it, to redeem by telephone up to $100,000 and have the proceeds mailed to
their address of record. Shareholders may also request by telephone to have the
proceeds mailed or wired to their predesignated bank account. In order to
request wire redemptions by telephone, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section on
the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption payments
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the account
and specifying the exact information to be changed. The letter
must be signed exactly as the shareholder's name(s) appears on
the account. An original signature and a signature guarantee are
required for each person in whose name the account is registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds
must be wired through a commercial bank which is a correspondent
of the savings bank. As this may delay receipt by the
shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire procedures with their bank and
submit any special wire transfer information with the telephone
redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Redemption requests by telephone (technically a repurchase agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program, may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account. New investors wishing to establish QuickSell may
so indicate on the application. Existing shareholders that wish to add QuickSell
25
<PAGE>
to their account may do so by completing a QuickSell Enrollment Form. After
sending in an enrollment form, shareholders should allow for 15 days for this
service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven (7) business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven (7) days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
Redemption by Checkwriting
All new investors and existing shareholders of SMTTFF who apply for
checks may use them to pay any person, provided that each check is for at least
$100 and not more than $5 million. By using the checks, the shareholder will
receive daily dividend credit on his or her shares until the check has cleared
the banking system. Investors who purchased shares by check may write checks
against those shares only after they have been on each Fund's books for seven
business days. Shareholders who use this service may also use other redemption
procedures. No shareholder may write checks against certificated shares. The
Funds pay the bank charges for this service. However, each Fund will review the
cost of operation periodically and reserves the right to determine if direct
charges to the persons who avail themselves of this service would be
appropriate. The Funds, Scudder Service Corporation and State Street Bank and
Trust Company each reserves the right at any time to suspend or terminate the
"Checkwriting" procedure.
Checks will be returned by the Custodian if there are insufficient
shares to meet the withdrawal amount. Potential fluctuations in the per share
value of SMTTFF should be considered in determining the amount of the check. An
investor should not attempt to close an account by check, because the exact
balance at the time the check clears will not be known when the check is
written.
Redemption-in-Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. Each
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which a Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the value of the net assets of that Fund at the beginning of
the period.
26
<PAGE>
Other Information
If a shareholder redeems all shares in the account, the shareholder
will receive, in addition to the net asset value thereof, all declared but
unpaid dividends thereon. The value of shares redeemed or repurchased may be
more or less than a shareholder's cost depending upon the net asset value at the
time of the redemption or repurchase. None of the Funds imposes a redemption or
repurchase charge, although a wire charge may be applicable for redemption
proceeds wired to a shareholder's bank account. Redemption of shares, including
redemptions undertaken to effect an exchange for shares of another Scudder fund,
and including exchanges and redemptions with SMTTFF by Checkwriting, may result
in tax consequences (gain or loss) to the shareholder, and the proceeds of such
redemptions may be subject to backup withholding (see "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefor may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted, (c) during which an emergency exists as a result of which disposal
by the Fund involved of securities owned by it is not reasonably practicable or
it is not reasonably practicable for that Fund fairly to determine the value of
its net assets, or (d) during which the SEC by order permits such suspension of
the right of redemption or a postponement of the date of payment or of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUNDS
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Scudder pioneered the no-load concept when it created the nation's
first no-load fund in 1928, and later developed the nation's first family of
no-load mutual funds.
Investors are encouraged to review the fee and expense tables and the
consolidated financial highlights of the Fund's prospectus for more specific
information about the rates at which management fees and other expenses are
assessed.
27
<PAGE>
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view Fund prospectuses and
profiles with links between summary information in Fund Summaries and details in
the Prospectus. Users can fill out new account forms on-line, order free
software, and request literature on Funds.
Account Access --The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders that have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of the Fund. A change of instructions for the method
of payment must be received by the Fund's transfer agent at least five days
prior to a dividend record date. Shareholders may change their dividend option
either by calling 1-800-253-2277 for Class AARP and 1-800-SCUDDER for Class S,
or by sending written instructions to the Transfer Agent. Please include your
account number with your written request.
Reinvestment is usually made at the closing net asset value of the
class determined on the business day following the record date. Investors may
leave standing instructions with the Transfer Agent designating their option for
either reinvestment or cash distributions of any income dividends or capital
gains distributions. If no election is made, dividends and distributions will be
invested in additional class shares of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of the Automated Clearing House Network (ACH) can have income
and capital gains distributions automatically deposited to their personal bank
account usually within three business days after a Fund pays its distribution. A
Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277for Class AARP. Confirmation Statements will be mailed
to shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains.
Reports to Shareholders
Each Fund issues to its respective shareholders annual and semiannual
financial statements (audited annually by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights for that Fund, as the case may
be.
28
<PAGE>
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-253-2277 (Class
AARP) and 1-800-SCUDDER (Class S).
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Medium Term Tax Free Fund Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund** Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund* Scudder New York Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
----------
+ The institutional class of shares is not part of the Scudder Family
of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
29
<PAGE>
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund **
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Stock Fund
Scudder Small Company Value Fund
Growth
Scudder Capital Growth Fund
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
----------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
30
<PAGE>
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-253-2277 (Class AARP) or 1-800-343-2890 (Class S).
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to IRS requirements, may be obtained by contacting Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103 or by
calling toll free, 1-800-SCUDDER. The discussions of the plans below describe
only certain aspects of the federal income tax treatment of the plan. The state
tax treatment may be different and may vary from state to state. It is advisable
for an investor considering the funding of the investment plans described below
to consult with an attorney or other investment or tax adviser with respect to
the suitability requirements and tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional Shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s). Any
such requests must be received by a Fund's transfer agent ten days prior to the
date of the first automatic withdrawal. An Automatic Withdrawal Plan may be
terminated at any time by the shareholder, the Trust or its agent on written
notice, and will be terminated when all Shares of a Fund under the Plan have
been liquidated or upon receipt by the Trust of notice of death of the
shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-253-2277 for Class AARP and 1-800-SCUDDER for Class S.
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts,
Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.
In its discretion, a Fund may accept minimum initial investments of
less than $2,500 (per Portfolio) as part of a continuous group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments, employee benefit
plans) provided that the average single account in any one Fund or Portfolio in
the group purchase plan will be $2,500 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
31
<PAGE>
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $2,500 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS -- Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments in Class S shares
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class S shares.
Shareholders may arrange to make periodic investments in Class AARP
class of each Fund through automatic deductions from checking accounts. The
minimum pre-authorized investment amount is $50. New shareholders who open a
Gift to Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the
Uniform Transfer to Minors Act (UTMA) and who sign up for the Automatic
Investment Plan will be able to open a Fund account for less than $500 if they
agree to increase their investment to $500 within a 10 month period. Investors
may also invest in any Class AARP for $500 if they establish a plan with a
minimum automatic investment of at least $100 per month. This feature is only
available to Gifts to Minors Account investors. The Automatic Investment Plan
may be discontinued at any time without prior notice to a shareholder if any
debit from their bank is not paid, or by written notice to the shareholder at
least thirty days prior to the next scheduled payment to the Automatic
Investment Plan.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trusts reserve the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
32
<PAGE>
33
<PAGE>
DIVIDENDS
The Funds will follow the practice of distributing substantially all of
their net investment income and any excess of net realized short-term capital
gains over net realized long-term capital losses. In the past, each Fund has
followed the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However, if
it appears to be in the best interest of such Fund and the relevant
shareholders, such Fund may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly on the fourth Boston business day of each month for
the preceding month's net income. Distributions of realized capital gains, if
any, are paid in November or December, although an additional distribution may
be made, if necessary, and each Fund expects to continue to distribute net
capital gains at least annually. Both types of distributions will be made in
shares of that Fund and confirmations will be mailed to each shareholder unless
a shareholder has elected to receive cash, in which case a check will be sent.
PERFORMANCE INFORMATION
From time to time, quotation of each Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return is the average annual compound rate of
return for the periods of one year, five years and ten years (or such shorter
periods as may be applicable dating from the commencement of the Fund's
operations) all ended on the last day of a recent calendar quarter. If a Fund
has been in existence for less than ten years, the average annual total return
for the life of the Fund is given. Average annual total return quotations
reflect changes in the price of the Fund's shares and assume that all dividends
and capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment, over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
34
<PAGE>
T = (ERV/P)^1/n - 1
Where:
P = A hypothetical initial investment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Return for periods ended May 31, 2000
One Five Ten
Year Years Years
---- ----- -----
Scudder Medium Term Tax Free Fund Class S*+ -0.20% 4.50% 6.26%
Scudder Managed Municipal Bonds Class S -0.62% 5.03% 6.82%
Scudder High Yield Tax Free Fund Class S** -1.28% 5.52% 7.27%
* The foregoing average annual total return for ten years includes the
period prior to November 1, 1990, during which the Fund operated under
the investment objective and policies of Scudder Tax Free Target Fund
1990 Portfolio. Average annual total return figures for the periods prior
to November 1, 1990 should not be considered representative of the
present Fund. Since the adoption of its current objectives on November 1,
1990, the average annual total return is 6.30%.
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total returns for the five and ten year periods would
have been lower.
+ If the Adviser had not temporarily capped expenses for the period
November 1, 1990 through October 31, 1995 and in 2000, the average annual
total return of the Fund for each period would have been lower.
Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = Ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
35
<PAGE>
Cumulative Total Return for periods ended May 31, 2000
One Five Ten
Year Years Years
Scudder Medium Term Tax Free Fund Class S* -0.20% 24.63% 83.47%
Scudder Managed Municipal Bonds Class S -0.62% 27.80% 93.42%
Scudder High Yield Tax Free Fund Class S** -1.28% 30.82% 101.78%
* The foregoing cumulative total return for ten years includes the period
prior to November 1, 1990, during which the Fund operated under the
investment objective and policies of Scudder Tax Free Target Fund 1990
Portfolio. Cumulative total return figures for the periods prior to
November 1, 1990 should not be considered representative of the present
Fund. Since the adoption of its current objectives on November 1, 1990,
the cumulative total return is 79.64%.
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, cumulative total return would have been lower.
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
SEC Yield is the net annualized yield based on a specified 30-day (or
one month) period assuming a semiannual compounding of income. Included in net
investment income is the amortization of market premium or accretion of market
and original issue discount. Yield, sometimes referred to as a Fund's "SEC
yield," is calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6 - 1]
Where:
a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of expense
maintenance).
c = The average daily number of shares outstanding
during the period that
were entitled to receive dividends.
d = The maximum offering price per share on the last
day of the period.
Yields for the 30-day period ended May 31, 2000
Scudder Medium Term Tax Free Fund Class S 4.79%
Scudder Managed Municipal Bonds Class S 5.19%
Scudder High Yield Tax Free Fund Class S 5.72%
Tax-Equivalent Yield is the net annualized taxable yield needed to
produce a specified tax-exempt yield at a given tax rate based on a specified
30-day (or one month) period assuming a reinvestment of all dividends paid
during such period (a method known as "semiannual compounding"). Tax-equivalent
yield is calculated by dividing that portion of the Fund's yield (as computed in
the yield description in D., above) which is tax-exempt by one minus a stated
Federal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
Tax-Equivalent Yields as of May 31, 2000
TAXABLE EQUIVALENT*
36
<PAGE>
<TABLE>
<CAPTION>
28% 31% 36% 39.6%
FUND Tax Bracket Tax Bracket Tax Bracket Tax Bracket
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Scudder Medium Term Tax Free Fund Class S 6.65% 6.94% 7.48% 7.93%
Scudder Managed Municipal Bonds Class S 7.21% 7.52% 8.11% 8.59%
Scudder High Yield Tax Free Fund Class S 7.94% 8.29% 8.94% 9.47%
</TABLE>
* Based on federal income tax rates in effect for the 1999 taxable year.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1999
calendar year.
<TABLE>
<CAPTION>
1999 Taxable Federal To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a
Income Brackets Tax Rates Taxable Investment Would Have To Earn*
Individual 5% 7% 9%
Return
------------------------------ ----------------------- -------------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
$0 - $25,750 15.0% 5.88% 8.24% 10.59%
$25,751- $62,450 28.0% 6.94% 9.72% 12.50%
$62,451 - $130,250 31.0% 7.25% 10.14% 13.04%
$130,251 - $283,150 36.0% 7.81% 10.94% 14.06%
Over $283,150 39.6% 8.28% 11.59% 14.90%
1999 Taxable Joint 5% 7% 9%
Income Brackets Return
------------------------------ ----------------------- -------------------- --------------------- -----------------------
$0 - $43,050 15.0% 5.88% 8.24% 10.59%
$43,051 - $104,050 28.0% 6.94% 9.72% 12.50%
$104,051 - $158,550 31.0% 7.25% 10.14% 13.04%
$158,551 - $283,150 36.0% 7.81% 10.94% 14.06%
Over $283,150 39.6% 8.28% 11.59% 14.90%
</TABLE>
* These illustrations assume the Federal AMT is not applicable, that an
individual is not a "head of household" and claims one exemption and that
taxpayers filing a joint return claim two exemptions. Note also that
these federal income tax brackets and rates do not take into account the
effects of (i) a reduction in the deductibility of itemized deductions
for taxpayers whose federal adjusted gross income exceeds $124,500
($62,250 in the case of a married individual filing a separate return),
or of (ii) the gradual phaseout of the personal exemption amount for
taxpayers whose federal adjusted gross income exceeds $124,500 (for
single individuals) or $186,800 (for married individuals filing jointly).
The effective federal tax rates and equivalent yields for such taxpayers
would be higher than those shown above.
Example:
Based on 1999 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $50,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that a fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
As described above, average annual total return, cumulative total
return, total return, yield, and tax-equivalent yield are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Average annual total return, cumulative total return, total return,
yield, and tax-equivalent yield for a Fund will vary based on changes in market
conditions and the level of a Fund's expenses.
37
<PAGE>
Investors should be aware that the principal of each Fund is not
insured.
Comparison of Fund Performance
In connection with communicating its performance to current or
prospective shareholders, a Fund may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, each Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Funds. In addition, the amount of assets that the Adviser has under
management in various geographical areas may be quoted in advertising and
marketing materials.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" that compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held and interest rate movements. For
equity funds, factors include a fund's overall investment objective, the types
of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds.
ORGANIZATION OF THE FUNDS
Scudder Medium Term Tax Free Fund is a series of Scudder Tax Free
Trust, a Massachusetts business trust established under a Declaration of Trust
dated December 28, 1982, as amended. The name and investment objectives of
SMTTFF were changed effective November 1, 1990. Scudder High Yield Tax Free Fund
is a series of Scudder Municipal Trust, a Massachusetts business trust
established under a Declaration of Trust dated September 24, 1976, as amended.
The Trustees of Scudder Municipal Trust have established and designated two
series of the Trust: Scudder Managed Municipal Bonds and Scudder High Yield Tax
Free Fund. Each Fund's authorized capital consists of an unlimited number of
38
<PAGE>
shares of beneficial interest, $.01 par value. SMMB and SMTTF are each further
divided into two classes of shares, Class AARP and Class S, while SHYTFF is
divided into five shares of classes, Class A, Class B, Class C, Class S and
Class AARP. Only Classes AARP and S are offered in this Statement of Additional
Information.
The Trustees of STFT have the authority to issue additional series of
shares and to designate the relative rights and preferences as between the
different series. Each share of each Fund has equal rights with each other share
of the Fund as to voting, dividends and liquidation. If more than one series of
shares were issued and a series were unable to meet its obligations, the
remaining series might have to assume the unsatisfied obligations of that
series. All shares issued and outstanding will be fully paid and non-assessable
by the Funds and redeemable as described in this Statement of Additional
Information and in the Funds' prospectuses.
The shares of SMT are issued in separate series, each share of which
represents an equal proportionate interest in that series with each other share
of that series. The Trustees of SMT have the authority to designate additional
series and to designate the relative rights and preferences as between the
different series.
The Trustees of SMT and STFT, in their discretion, may authorize the
division of shares of each of their respective Funds (or shares of a series)
into different classes permitting shares of different classes to be distributed
by different methods. Although shareholders of different classes of a series
would have an interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution. The Trustees have no present intention of taking the
action necessary to effect the division of shares into separate classes (which
under present regulations would require the Funds first to obtain an exemptive
order of the SEC), nor of changing the method of distribution of shares of the
Funds.
Currently, the assets of SMT and STFT received for the issue or sale of
the shares of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such series and constitute the underlying assets of such series. The underlying
assets of each series are segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a share of the
general liabilities of SMT. If a series were unable to meet its obligations, the
assets of all other series may in some circumstances be available to creditors
for that purpose, in which case the assets of such other series could be used to
meet liabilities which are not otherwise properly chargeable to them. Expenses
with respect to any two or more series are to be allocated in proportion to the
asset value of the respective series except where allocations of direct expenses
can otherwise be fairly made. The officers of SMT and STFT, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given series, or which are general or allocable
to two or more series. In the event of the dissolution or liquidation of SMT and
STFT, the holders of the shares of any series are entitled to receive as a class
the underlying assets of such shares available for distribution to shareholders.
Shares of SMT and STFT entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
Pursuant to the approval of a majority of stockholders, the Trustees of
SMT and STFT have the discretion to retain the current distribution arrangement
while investing in a master fund in a master/feeder fund structure if the Board
determines that the objectives of a Fund would be achieved more efficiently
thereby.
Each Fund's Declaration of Trust provides that obligations of the Fund
involved are not binding upon the Trustees individually but only upon the
property of that Fund, that the Trustees and officers will not be liable for
errors of judgment or mistakes of fact or law, and that the Fund involved will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Fund except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Fund involved.
39
<PAGE>
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., an investment counsel firm, acts as
investment adviser to the Funds. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc., is one of the most experienced investment
counsel firms in the U.S. It was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. In 1928 it introduced the first no-load mutual fund to the public.
In 1953 the Adviser introduced Scudder International Fund, Inc., the first
mutual fund available in the U.S. investing internationally in securities of
issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Adviser, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Adviser. The Adviser's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations, as well as providing investment advice to over 280 open- and
closed-end mutual funds.
The Adviser maintains a large research department, which conducts
ongoing studies of the factors that affect the position of various industries,
companies and individual securities. The Adviser receives published reports and
statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. In selecting the securities in which
the Funds may invest, the conclusions and investment decisions of the Adviser
with respect to the Funds are based primarily on the analyses of its own
research department.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
40
<PAGE>
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Funds.
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as the Funds. You
should be aware that the Funds are likely to differ from these other mutual
funds in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Funds can be expected to vary from those of the other mutual
funds.
Upon consummation of the transaction between Zurich and B.A.T, the
Funds' existing investment management agreements with Scudder Kemper were deemed
to have been assigned and, therefore, terminated. The Board approved new
investment management agreements (the "Agreements") with Scudder Kemper, which
are substantially identical to the prior investment management agreements,
except for the date of execution and termination. The agreements became
effective September 7, 1998, upon the termination of the then current investment
management agreements and were approved at a shareholder meeting held on
December 15, 1998.
New agreements for Scudder Managed Municipal Bonds and for Scudder
Medium Term Tax Free Fund were last approved by the Board on July 10, 2000 and
became effective on July 31, 2000. A new agreement for Scudder High Yield Tax
Free Fund was last approved by the Board on July 10, 2000 and becomes effective
on October 2, 2000. The Agreements continue in effect until September 30, 2001.
The Agreements will continue from year to year thereafter only if their
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreements or interested persons of the Adviser or the
Trust, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Trustees or of a majority of the
outstanding voting securities of the Funds. The Agreements may be terminated at
any time without payment of penalty by either party on sixty days' notice and
automatically terminates in the event of its assignment.
Under the Agreements, the Adviser regularly provides the Funds with
continuing investment management consistent with each Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for each Fund, what securities shall be held or sold by each Fund, and
what portion of each Fund's assets shall be held uninvested, subject always to
the provisions of each Fund's Declaration of Trust and By-Laws, of the 1940 Act
and the Code and to each Fund's investment objectives, policies and
restrictions, and subject further to such policies and instructions as the
Trustees of each Fund may from time to time establish. The Adviser also advises
and assists the officers of each Fund in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of the Funds.
Under the Agreements, the Adviser also renders significant
administrative services (not otherwise provided by third parties) necessary for
the Funds' operations as an open-end investment company including, but not
limited to, preparing reports and notices to the Trustees and shareholders;
supervising, negotiating contractual arrangements with, and monitoring various
third-party service providers to the Funds (such as the Funds' transfer agent,
pricing agents, custodian, accountants and others); preparing and making filings
with the SEC and other regulatory agencies; assisting in the preparation and
filing of the Funds' federal, state and local tax returns; preparing and filing
the Fund's federal excise tax returns; assisting with investor and public
relations matters; monitoring the valuation of securities and the calculation of
net asset value; monitoring the registration of shares of the Funds under
applicable federal and state securities laws; maintaining the Funds' books and
records to the extent not otherwise maintained by a third party; assisting in
establishing accounting policies of the Funds; assisting in the resolution of
accounting and legal issues; establishing and monitoring the Funds' operating
budget; processing the payment of the Funds' bills; assisting the Funds in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting the Funds in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses (except expenses
incurred in attending Board and committee meetings outside New York, New York
and Boston, Massachusetts) of all Trustees and executive employees of each Fund
affiliated with the Adviser and makes available, without expense to the Funds,
the services of such trustees, officers and employees of the Adviser as may duly
be elected Trustees of the Funds, subject to their individual consent to serve
and to any limitations imposed by law, and provides each Fund's office space and
facilities.
41
<PAGE>
For the above services SMTTFF pays an annual rate of 0.60 of 1% of the
first $500 million of average daily net assets and 0.50 of 1% of such assets in
excess of $500 million on an annual basis, and 0.475 of 1% of such assets in
over $1 billion, payable monthly, provided the Fund will make such interim
payments as may be requested by the Adviser not to exceed 75% of the amount of
the fee then accrued on the books of the Fund and unpaid.
For the years ended December 31, 1997 and 1998, SMTTFF's fees pursuant
to such Agreement amounted to $3,710,976 and $3,867,414, respectively. For the
five-month period ended May 31, 1999, and the fiscal year ended May 31, 2000,
the fees imposed amounted to $1,588,972 and $3,392,370, respectively.
Prior to July 31, 2000, for the above services SMMB paid 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. Currently for Scudder Kemper's services, Scudder Managed
Municipal Bonds pays Scudder Kemper a fee equal to 0.490% of average daily net
assets on such assets up to $2 billion, 0.465% of average daily net assets on
such assets exceeding $2 billion, and 0.440% of average daily net assets on such
assets exceeding $3 billion. The fee is payable monthly, provided the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid.
For the years ended December 31, 1997 and 1998, aggregate fees incurred
by SMMB pursuant to its investment advisory agreement amounted to $3,705,253 and
$3,760,257, respectively. For the five-month period ended May 31, 1999, the fee
imposed amounted to $1,547,581. For the fiscal year ended May 31, 2000, the fees
imposed amounted to $3,550,506, which was equivalent to an annual rate of 0.52%
of the Fund's average daily net assets.
For the above services SHYTFF pays an annual rate of 0.65 of 1% on the
first $300 million of average daily net assets and 0.60 of 1% on the next $200
million, and 0.575 of 1% of average daily net assets exceeding $500 million,
payable monthly, provided the Fund will make such interim payments as may be
requested by the Adviser not to exceed 75% of the amount of the fee then accrued
on the books of the Fund and unpaid.
The Adviser agreed not to impose all or a portion of its investment
advisory fee with respect to SHYTFF in order to maintain the annualized expenses
of Class S shares of the Fund at not more than 0.80% of average daily net assets
of the Fund from May 1, 2000 until October 1, 2000. For the years ended December
31, 1997 and 1998, fees incurred by SHYTFF amounted to $2,050,368 and
$2,440,931, respectively. For the five-month period ended May 31, 1999, the fees
imposed amounted to $1,171,322. For the fiscal year ended May 31, 2000, the fees
imposed amounted to $2,690,614, which was equivalent to an annual effective rate
of 0.64% of the Fund's average daily net assets.
Legal counsel has advised the Fund that for completed fiscal periods
the Adviser would have been liable for failure to comply with the terms of a
publicly announced expense limitation.
Under the Agreements, each Fund is responsible for all of its other
expenses, including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; taxes and governmental fees; the fees and expenses of the
Transfer Agent; the cost of preparing share certificates and any other expenses,
including clerical expenses, of issuance, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees,
officers and employees of the Funds who are not affiliated with the Adviser; the
cost of printing and distributing reports and notices to shareholders; and the
fees and disbursements of custodians. Each Fund may arrange to have third
parties assume all or part of the expenses of sale, underwriting and
distribution of shares of such Fund. Each Fund is also responsible for expenses
of shareholders' meetings and expenses incurred in connection with litigation,
proceedings and claims and the legal obligation it may have to indemnify its
officers and Trustees with respect thereto.
The expense ratios for SMTTFF for the years ended December 31, 1996,
1997 and 1998 were 0.72%, 0.74% and 0.72%, respectively. The annualized expense
ratio for the five-month period ended May 31, 1999, and the expense ratio for
42
<PAGE>
the fiscal year ended May 31, 2000, were 0.72% and 0.74%, respectively. The
expense ratios of SMMB for the years ended December 31, 1996, 1997 and 1998 were
0.63%, 0.64% and 0.62%, respectively. The annualized expense ratio for the
five-month period ended May 31, 1999, and the expense ratio for the fiscal year
ended May 31, 2000, were 0.64% and 0.66%, respectively. Since the Adviser
maintained Fund expenses as described above, the expense ratios for SHYTFF were
0.91%, 0.90% and 0.84% for the years ended December 31, 1996, 1997 and 1998,
respectively. The annualized expense ratio for the five-month period ended May
31, 1999 and the expense ratio for the fiscal year ended May 31, 2000, were
0.83% and 0.89%, respectively. If expense maintenance had not been in effect,
total annualized Fund operating expenses for SHYTFF for the year ended 1996
would have been 0.95% of average daily net assets. Any fee advance required to
be returned to a Fund will be returned as promptly as practicable after the end
of the Fund's year. However, no fee payment will be made to the Adviser during
any year which will cause year-to-date expenses to exceed the cumulative pro
rata expense limitation at the time of such payment. The amortization of
organizational costs is described herein under "ADDITIONAL INFORMATION -- Other
Information."
Scudder Medium Term Tax Free Fund and Scudder Managed Municipal Bond
have each entered into an administrative services agreement (an "Administrative
Agreement") with Scudder Kemper, pursuant to which Scudder Kemper will provide
or pay others to provide substantially all of the administrative services
required by a Fund (other than those provided by Scudder Kemper under its
investment management agreement with the Fund, as described above) in exchange
for the payment by the Fund of an administrative services fee (the
"Administrative Fee") of 0.15% of its average daily net assets. The
Administrative Fee became effective on July 31, 2000 for Scudder Medium Term Tax
Free Fund and Scudder Managed Municipal Bond.
Various third-party service providers (the "Service Providers"), some
of which are affiliated with Scudder Kemper, provide certain services to the
Funds pursuant to separate agreements with the Funds. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Funds and maintains their accounting records. Scudder Service Corporation, also
a subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Funds. Scudder Trust Company, an
affiliate of Scudder Kemper, provides subaccounting and recordkeeping services
for shareholders in certain retirement and employee benefit plans. As custodian,
State Street Bank holds the portfolio securities of the Funds, pursuant to a
custodian agreement. PricewaterhouseCoopers LLP audits the financial statements
of the Funds and provides other audit, tax, and related services. Willkie Farr
and Gallagher acts as general counsel for the Funds.
Scudder Kemper will pay the Service Providers for the provision of
their services to the Funds and will pay other fund expenses, including
insurance, registration, printing and postage fees. In return, each Fund will
pay Scudder Kemper an Administrative Fee.
Each Administration Agreement has an initial term of three years,
subject to earlier termination by the Fund's Board. The fee payable by a Fund to
Scudder Kemper pursuant to the Administration Agreements is reduced by the
amount of any credit received from the Fund's custodian for cash balances.
Certain expenses of the Funds will not be borne by Scudder Kemper under
the Administration Agreements, such as taxes, brokerage, interest and
extraordinary expenses; and the fees and expenses of the Independent Trustees
(including the fees and expenses of their independent counsel). In addition,
each Fund will continue to pay the fees required by its investment management
agreement with Scudder Kemper.
The Agreements identify the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens & Clark, Inc." (together, the "Scudder Marks"). Under
this license, each Trust, with respect to a Fund, has the non-exclusive right to
use and sublicense the Scudder name and marks as part of its name, and to use
the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreements and in discussions with
Scudder Kemper Investments, Inc. concerning the Agreements, Trustees who are not
"interested persons" of the Adviser are represented by independent counsel at
each Fund's expense.
The Agreements provide that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by one of the Funds
in connection with matters to which the Agreements relate, except a loss
43
<PAGE>
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or Officers of a Fund may have dealings with that
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in
return for services relating to investments by AARP members in AARP Class shares
of each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of AARP Classes of all funds managed by Scudder Kemper. The
fee rates, which decrease as the aggregate net assets of the AARP Classes become
larger, are as follows: 0.07% for the first $6 billion in net assets, 0.06% for
the next $10 billion and 0.05% thereafter.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between Scudder Kemper Investments, Inc. and
AMA Solutions, Inc., a subsidiary of the American Medical Association (the
"AMA"), dated May 9, 1997, the Adviser has agreed, subject to applicable state
regulations, to pay AMA Solutions, Inc. royalties in an amount equal to 5% of
the management fee received by the Adviser with respect to assets invested by
AMA members in Scudder funds in connection with the AMA InvestmentLink(SM)
Program. The Adviser will also pay AMA Solutions, Inc. a general monthly fee,
currently in the amount of $833. The AMA and AMA Solutions, Inc. are not engaged
in the business of providing investment advice and neither is registered as an
investment adviser or broker/dealer under federal securities laws. Any person
who participates in the AMA InvestmentLink(SM) Program will be a customer of the
Adviser (or of a subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
44
<PAGE>
Code of Ethics
The Funds, the Adviser and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Funds and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Funds, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Funds. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Name, Age and Address Position with Principal Occupation** Position with
---------------------- -------------- ---------------------- Underwriter, Scudder
Trust Investor Services, Inc.
----- -----------------------
<S> <C> <C> <C>
Linda C. Coughlin (48)+* President and Managing Director of Scudder Director and Senior
Trustee Kemper Investments, Inc. Vice President
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational --
WGBH Foundation
125 Western Ave.
Allston, MA 02134
45
<PAGE>
Name, Age and Address Position with Principal Occupation** Position with
---------------------- -------------- ---------------------- Underwriter, Scudder
Trust Investor Services, Inc.
----- -----------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for --
Driscoll Associates Business Ethics, Bentley
4909 SW 9th Place College; President, Driscoll
Cape Coral, FL 33914 Associates (consulting firm)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic
50023 Brogden Counsellor, The Conference
Chapel Hill, NC Board, Inc. (Not-for-profit
business research organization)
Keith R. Fox (46) Trustee General Partner, Exeter Group of
10 East 53rd Street Funds
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke Charitable
Doris Duke Charitable Foundation Foundation; Department of State
650 Fifth Avenue - Undersecretary of State for
New York, NY 10128 Economic, Business and
Agricultural Affairs (March 1993
to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S.
Washington, D.C. General Accounting Office
(1996-1997); Partner, Fulbright
& Jaworski (law firm) (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place Capital, LLC (venture capital
23rd Floor firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP --
601 E. Street, NW Services, Inc.
7th Floor
Washington, D.C. 20004
46
<PAGE>
Name, Age and Address Position with Principal Occupation** Position with
---------------------- -------------- ---------------------- Underwriter, Scudder
Trust Investor Services, Inc.
----- -----------------------
Kathryn L. Quirk (47) # Vice President and Managing Director of Scudder Senior Vice President,
Assistant Secretary Kemper Investments, Inc. Director, Chief Legal
Officer and Assistant
Clerk
Thomas V. Bruns (43)*** Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Philip G. Condon (49) + Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ashton P. Goodfield (35) + Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Ann M. McCreary (43) # Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John R. Hebble (42) + Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Caroline Pearson (37) + Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
John Millette (37) + Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
William F. Glavin (41) + Vice President Managing Director of Scudder Vice President
Kemper Investments, Inc.
James E. Masur (40) + Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Howard Schneider (43) + Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Brenda Lyons (37) + Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
</TABLE>
* Mr. Zaleznick and Ms. Coughlin are considered by the Funds and their
counsel to be Trustees who are "interested persons" of the Adviser or of
the Funds, within the meaning of the 1940 Act.
** Unless otherwise stated, all Trustees and Officers have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
47
<PAGE>
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
*** Address: 222 South Riverside Plaza, Chicago, Illinois
Certain accounts for which Scudder Kemper acts as investment adviser
owned 9,406,193 shares in the aggregate, or 17.17% of the outstanding shares of
SMTTFF on August 31, 2000. Scudder Kemper may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
As of August 31, 2000, all Trustees and officers of the Trust, as a
group owned beneficially, as that term is defined in Section 13 (d) of the
Securities Exchange Act of 1934) less than 1% the outstanding shares of any
class of Scudder Managed Municipal Bonds, Scudder High Yield Tax Free Fund and
Scudder Medium Term Tax Free Fund.
To the best of the Trust's knowledge, as of August 31, 2000, no person
owned of record more than 5% or more of the outstanding shares of any class of
any Fund, except as stated below. They may be deemed to be the beneficial owner
of certain of these shares.
<TABLE>
<CAPTION>
---------------------------- -------------------------- -------------- ---------------------- ------------------------
NAME FUND CLASS SHARES PERCENTAGE
---------------------------- -------------------------- -------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
Charles Schwab & Co. Medium Term Tax Free S 5,717,048 10.43%
101 Montgomery Street
San Francisco, CA 94101
---------------------------- -------------------------- -------------- ---------------------- ------------------------
Charles Schwab & Co. High Yield Tax Free S 4,196,904 11.27%
101 Montgomery Street
San Francisco, CA 94101
---------------------------- -------------------------- -------------- ---------------------- ------------------------
Charles Schwab & Co. Managed Municipal Bonds S 5,093,093 5.83%
101 Montgomery Street
San Francisco, CA 94101
---------------------------- -------------------------- -------------- ---------------------- ------------------------
</TABLE>
48
<PAGE>
Certain accounts for which Scudder Kemper acts as investment adviser
owned 8,913,762 shares in the aggregate, or 10.21% of the outstanding shares of
SMMB Class S as of August 31,2000. Scudder Kemper may be deemed to be the
beneficial owner of such shares but disclaims any beneficial interest in such
shares.
To the best of the Trust's knowledge, as of August 31, 2000, no person
owned beneficially more than 5% of SMMB's outstanding shares except as stated
above.
As of August 31, 2000, 4,196,904 shares in the aggregate, or 11.27% of
the outstanding Shares of SHYTFF were held in the name of Charles Schwab & Co.,
101 Montgomery Street, San Francisco, CA 94104, who may be deemed to be the
beneficial owner of such shares.
To the best of the Trust's knowledge, as of August 31, 2000, no person
owned beneficially more than 5% of SHYTFF's outstanding shares, except as stated
above.
The Trustees and Officers of STFT and SMT also serve in similar
capacities with other Scudder funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Funds' business. A majority of the Board's members are not affiliated with the
Adviser. These "Independent Trustees" have primary responsibility for assuring
that the Funds are managed in the best interests of their shareholders.
49
<PAGE>
The Board of Trustees meets at least quarterly to review the investment
performance of the Funds and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Funds' investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Funds' independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as lead trustee receives additional
compensation for his or her service. No additional compensation is paid to any
Independent Trustee for travel time to meetings, attendance at trustee's
educational seminars or conferences, service on industry or association
committees, participation as speakers at trustees' conferences or service on
special trustee task forces or subcommittees. Independent Trustees do not
receive any employee benefits such as pension or retirement benefits or health
insurance. Notwithstanding the schedule of fees, the Independent Trustees have
in the past and may in the future waive a portion of their compensation.
The Independent Trustees of the Funds also serve as Independent
Trustees of certain other Scudder Funds, which enables them to address
investment and operational issues that are common to many of the Scudder Funds
in a cost-efficient and effective manner. During1999, the Independent Trustees
participated in 25 meetings of the Funds' board or board committees, which were
held on 21 different days during the year.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1999 from the Trust and from all of Scudder funds as a group.
50
<PAGE>
<TABLE>
<CAPTION>
Scudder Scudder Tax All Scudder
Name Municipal Trust* Free Trust** Funds
---- --------------- ------------ -----
<S> <C> <C> <C> <C>
Henry P. Becton, Jr. $12,910 $12,310 $140,000 (30 funds)
Dawn-Marie Driscoll $13,714 $13,114 $150,000 (30 funds)
Edgar R. Fiedler*** $0 $0 $73,230 (29 funds)
Keith R. Fox*** $0 $0 $160,325 (23 funds)
Joan E. Spero*** $0 $0 $175,275 (23 funds)
Jean Gleason Stromberg*** $0 $0 $40,935 (16 funds)
Jean C. Tempel $12,982 $12,383 $140,000 (30 funds)
</TABLE>
* Scudder Municipal Trust consists of two Funds: Scudder Managed Municipal
Bonds and Scudder High Yield Tax Free Fund
** In 1999, Scudder Tax Free Trust consisted of two Funds: Scudder Medium
Term Tax Free Fund and Scudder Limited Term Tax Free Fund. Scudder
Limited Term Tax Free Fund was acquired by SMTTFF on July 31, 2000.
*** Newly-elected Trustee. On July 11, 2000, shareholders of each fund elected
a new Board of Trustees. See the "Trustees and Officers" section for the
newly-constituted Board of Trustees.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trusts, although they are
compensated as employees of the Adviser, or its affiliates as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
Each Fund has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), Two International Place, Boston, MA 02110-4103, a
Massachusetts corporation, which is a subsidiary of the Adviser, a Delaware
corporation. The underwriting agreements of SMTTFF, SMMB and SHYTFF each dated
May 8, 2000 will remain in effect until September 30, 2001 and from year to year
thereafter only if their continuance is approved annually by a majority of the
Trustees who are not parties to such agreements or "interested persons" of any
such party and by a vote either of a majority of the Trustees or a majority of
the outstanding voting securities of the relevant Fund. The underwriting
agreement of each Fund was last approved by the Trustees on July 10, 2000.
Under the underwriting agreements, each Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectuses and any amendments
and supplements thereto; the registration and qualification of shares for sale
in the various states, including registering a Fund as a broker/dealer in
various states, as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor), notices, proxy statements,
51
<PAGE>
reports or other communications to shareholders of that Fund; the cost of
printing and mailing confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both that Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of each Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by that Fund, unless a rule 12b-1 plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although each Fund does not currently have a 12b-1 Plan, and
the Trustees have no current intention of adopting one, the
Fund would also pay those fees and expenses permitted to be
paid or assumed by that Fund pursuant to a 12b-1 Plan, if any,
were such a plan adopted by the Fund, notwithstanding any
other provision to the contrary in the underwriting agreement.
As agent, the Distributor currently offers shares of each Fund and
Portfolio on a continuous basis to investors in all states in which the Fund may
from time to time be registered or where permitted by applicable law. Each
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of any Fund.
TAXES
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in the Statement of Additional Information
in light of their particular tax situation.
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and has qualified as such. Each of the Funds intends to continue to so qualify,
in each taxable year as required under the Code in order to avoid payment of
federal income tax at the Fund level.
In order to qualify as a regulated investment company, each Fund must
meet certain requirements regarding the source of its income and the
diversification of its assets.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income and net short-term capital gain in
excess of net long-term capital loss and at least 90 percent of its tax-exempt
net investment income and generally is not subject to federal income tax to the
extent that it distributes annually all of its taxable net investment income and
net realized long-term and short-term capital gains in the manner required under
the Code. Each of the Funds intends to distribute annually all taxable and
tax-exempt net investment income and net realized capital gains in compliance
with applicable distribution requirements and therefore does not expect to pay
federal income tax.
If for any taxable year a Fund does not qualify for special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareholders).
Each of the Funds is subject to a 4% nondeductible excise tax on
amounts of taxable income required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of such Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year as well as amounts that were neither distributed nor taxed to the Fund
during the prior calendar year. (Investment companies with taxable years ending
on November 30 or December 31 may make an irrevocable election to measure the
52
<PAGE>
required capital gain distribution using their actual taxable year.) Although
the Funds' distribution policies should enable them to avoid excise tax
liability, each Fund may retain (and be subject to income or excise tax on) a
portion of its capital gain or other income if it appears to be in the best
interest of such Fund and its shareholders.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward or post-October loss of a Fund from
the prior fiscal year. As of May 31, 2000, SHYTFF had a net tax basis capital
loss carryforward of approximately $6,600,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until May 31, 2005 ($3,900,000) and May 31, 2008 ($2,700,000), the respective
expiration dates, whichever occurs first. As of May 31, 2000, SMMB had a net tax
basis capital loss carryforward of approximately $3,700,000, which may be
applied against any realized net taxable capital gains of each succeeding year
until fully utilized or until May 31, 2008, the expiration date, whichever
occurs first. As of May 31, 2000, SMTTFF had a net tax basis capital loss
carryforward of approximately $3,200,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until May 31, 2008, the expiration date, whichever occurs first.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Funds for reinvestment, requiring
federal income taxes to be paid thereon, the Fund involved will elect to treat
such capital gains as having been distributed to its shareholders. As a result,
shareholders will report such capital gains as long-term capital gains will be
able to claim a proportionate share of federal income taxes paid by that Fund on
such gains as a credit against the shareholder's federal income tax liability,
and will be entitled to increase the adjusted tax basis of the shareholder's
Fund shares by the difference between such reported gains and the shareholder's
tax credit. However, retention of such gains by a Fund may cause the Fund to be
liable for an excise tax on all or a portion of those gains.
Properly designated distributions of taxable net investment income and
the excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow-through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of the taxable year is invested in state,
municipal and other obligations the interest on which is exempt under Section
103(a) of the Code. Each of the Funds intends to satisfy this 50% requirement in
order to permit distributions of tax-exempt interest to be treated as such for
federal income tax purposes in the hands of their shareholders. Distributions to
shareholders of tax-exempt interest earned by such Funds for the taxable year
are therefore not subject to regular federal income tax, although they may be
subject to the individual and corporate alternative minimum taxes described
below. Discount from certain stripped tax-exempt obligations or their coupons,
however, may be taxable.
If a Fund invests in certain high yield original issue discount
obligations issued by corporations (including tax-exempt obligations), a portion
of the original issue discount accruing on the obligation may be treated as
taxable dividend income. In such event, dividends of investment company taxable
income received from the Fund by its shareholders, to the extent attributable to
such portion of accrued original issue discount, would be taxable. Any such
dividends received by the Fund's corporate shareholders may be eligible for the
deduction for dividends received by corporations.
Any market discount recognized on a tax-exempt bond is taxable as
ordinary income. A market discount bond is a bond acquired in the secondary
market at a price below its redemption value (or its adjusted issue price if
issued with original issue discount). Under prior law, the treatment of market
discount as ordinary income did not apply to tax-exempt obligations. Gain on the
disposition of a tax-exempt obligation will be treated as ordinary income
(instead of capital gain) to the extent of accrued market discount.
Since no portion of the income of each of the Funds will be comprised
of dividends from domestic corporations, none of the income distributions of the
Funds will be eligible for the 70% deduction for dividends received from a Fund
by its corporate shareholders.
53
<PAGE>
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable as long-term capital
gains, regardless of the length of time the shares of the Fund involved have
been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction to corporate shareholders of the Funds. Any loss
realized upon the redemption of shares of a Fund within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain with respect to
such shares. Any short-term capital loss realized upon the redemption of shares
of a Fund within six months from the date of their purchase will be disallowed
to the extent of any tax-exempt dividends received with respect to such shares.
Any loss realized on the redemption of shares of one of such Funds may be
disallowed if shares of the same Fund are purchased (including shares purchased
under the dividend investment plan or the automatic reinvestment plan) within 30
days before or after such redemption.
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to or increase their
liability under the 20% AMT. A portion of such distributions may constitute a
tax preference item for individual shareholders and may subject them to or
increase their liability under the 26% and 28% AMT.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the federal income tax status of all distributions,
including a statement of the percentage of the prior calendar year's
distributions which were designated as tax-exempt, the percentage of such
tax-exempt distributions treated as a tax-preference item for purposes of the
AMT, and the source of such distributions on a state-by-state basis. All
distributions of taxable or tax-exempt net investment income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and distributions
declared in October, November or December to shareholders as of a record date in
such a month will be deemed to have been received by shareholders in December if
paid during January of the following year. Redemptions of shares including
exchanges for shares of another Scudder Fund may result in tax consequences
(gain or loss) to the shareholder and are also subject to these reporting
requirements.
Investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them (to the extent that
such distribution is from taxable income or gain).
All futures contracts and all options on futures contracts written or
purchased will be governed by Section 1256 of the Code. Absent a tax election to
the contrary, gain or loss attributable to the lapse, exercise or closing out of
any such position generally will be treated as 60% long-term and 40% short-term
capital gain or loss, and on the last trading day of the fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e. treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss.
Positions of each Fund, which consist of at least one debt security not
governed by Section 1256 and at least one futures contract or option on a
futures contract governed by Section 1256 which substantially diminishes the
risk of loss with respect to such debt security, will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor their transactions in options and futures and may make certain tax
elections in order to mitigate the operation of these rules and prevent their
disqualification as regulated investment companies for federal income tax
purposes.
Under the federal income tax law, each Fund will be required to report
to the IRS all distributions of taxable income, capital gains and gross proceeds
from the redemption or exchange of shares, except in the case of certain exempt
54
<PAGE>
shareholders. Under the "backup withholding" tax provisions of Section 3406 of
the Code, distributions of taxable income and capital gains and proceeds from
the redemption or exchange of shares are generally subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish a regulated investment company with their taxpayer
identification numbers and with their required certifications regarding their
status under the federal income tax law. Under a special exception,
distributions of taxable income and capital gains of each Fund will not be
subject to backup withholding if each reasonably estimates that at least 95% of
all such distributions will consist of tax-exempt interest dividends. However,
the proceeds from the redemption or exchange of shares of each Fund may be
subject to backup withholding. If the withholding provisions are applicable, any
such distributions and proceeds, whether distributed in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of each Fund will not be deductible for federal income tax purposes.
Under rules used by the IRS to determine when borrowed funds are used for the
purpose of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed funds even though the borrowed
funds are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
The Funds have not undertaken any investigation as to the users of the
facilities financed by bonds in their portfolios.
Tax legislation in recent years has included several provisions that
may affect the supply of, and the demand for, tax-exempt bonds, as well as the
tax-exempt nature of interest paid thereon.
It is not possible to predict with certainty the effect of these recent
tax law changes upon the tax-exempt bond market, including the availability of
obligations appropriate for investment, nor is it possible to predict any
additional restrictions that may be enacted in the future. Each Fund will
monitor developments in this area and consider whether changes in its objectives
or policies are desirable.
Shareholders may be subject to state and local taxes on distributions
from each Fund and redemptions of the shares of each Fund. Some states exempt
from the state personal income tax distributions received from a regulated
investment company to the extent such distributions are derived from interest on
obligations issued by such state or its municipalities or political
subdivisions.
Each Fund is organized as a Massachusetts business trust or a series of
such trust and is not liable for any income or franchise tax in The Commonwealth
of Massachusetts provided that each qualifies as a regulated investment company
under the Code.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under an applicable income
tax treaty) on amounts constituting ordinary income received by him or her.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations and applicable state and local tax
laws. Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
The Adviser supervises allocation of brokerage.
55
<PAGE>
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
For each Fund, purchases and sales of fixed-income securities, are
generally placed by the Adviser with primary market makers for these securities
on a net basis, without any brokerage commission being paid by a Fund. Trading
does, however, involve transaction costs. Transactions with dealers serving as
primary market makers reflect the spread between the bid and asked prices.
Purchases of underwritten issues may be made, which will include an underwriting
fee paid to the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Funds. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for a
Fund to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction on account of execution services and
the receipt of research services. The Adviser has negotiated arrangements, which
are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or a Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with broker/dealers on the basis that the
broker/dealer has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of a Fund with issuers, underwriters or
other brokers and dealers. The Distributor will not receive any commission, fee
or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to
the Funds and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Funds, and not all such information is used by the
Adviser in connection with the Funds. Conversely, such information provided to
the Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Funds.
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
The portfolio turnover rate of SMTTFF (defined by the SEC as the ratio
of the lesser of sales or purchases to the monthly average value of such
securities owned during the year, excluding all securities whose remaining
maturates at the time of acquisition were one year or less) for the years ended
December 31, 1997 and 1998 were 13% and 11%, respectively. For the five months
ended May 31, 1999, and the fiscal year ended May 31, 2000, the portfolio
turnover rates were 13% (annualized) and 21%, respectively. The portfolio
turnover rates of SMMB for the years ended December 31, 1997 and 1998 were 10%
and 9%, respectively. For the five months ended May 31, 1999, and the fiscal
year ended May 31, 2000, the portfolio turnover rates were 14% (annualized) and
47%, respectively. The portfolio turnover rates of SHYTFF for the years ended
December 31, 1997 and 1998 were 33% and 14%, respectively. For the five months
ended May 31, 1999, and the fiscal year ended May 31, 2000, the portfolio
turnover rate was 7% (annualized) and 62%, respectively.
56
<PAGE>
NET ASSET VALUE
The net asset value of shares of each class of the Fund is computed as
of the close of regular trading on the Exchange on each day the Exchange is open
for trading (the "Value Time"). The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Net asset value per share
is determined separately for each class of shares by dividing the value of the
total assets of a Fund, less all liabilities attributable to that class, by the
total number of shares of that class outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation on such exchange as of the Value Time. An equity security
which is traded on the Nasdaq Stock Market Inc. ("Nasdaq") system will be valued
at its most recent sale price on such system as of the Value Time. Lacking any
sales, the security is valued at the most recent bid quotation as of the Value
Time. The value of an equity security not quoted on the Nasdaq System, but
traded in another over-the-counter market, is its most recent sale price if
there are any sales of such security on such market as of the Value Time.
Lacking any sales, the security is valued at the Calculated Mean quotation for
such security as of the Value Time. Lacking a Calculated Mean quotation, the
security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at
prices supplied by the Funds' pricing agent(s), which reflect broker/dealer
supplied valuations and electronic data processing techniques. Money market
instruments with an original maturity of sixty days or less maturing at par
shall be valued by the amortized cost, which the Board believes approximates
market value. If it is not possible to value a particular debt security pursuant
to these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner that, in the discretion of the Valuation Committee most fairly
reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
57
<PAGE>
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Funds included in the Funds'
prospectuses and the Financial Statements incorporated by reference in this
Statement of Additional Information have been incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, Massachusetts 02110, independent accountants, and given on the authority
of said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP
is responsible for performing annual audits of the financial statements and
financial highlights of the Fund in accordance with generally accepted auditing
standards and the preparation of federal tax returns.
Shareholder Indemnification
STFT and SMT are organizations of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declarations of Trust of each Trust
contain an express disclaimer of shareholder liability in connection with the
Funds' property or the acts, obligations or affairs of the Funds. The
Declarations of Trust also provide for indemnification out of the Funds'
property of any shareholder held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which a
Fund itself would be unable to meet its obligations.
58
<PAGE>
59
<PAGE>
60
<PAGE>
Other Information
The CUSIP number for the Class AARP of SMTTFF is 811236-504.
The CUSIP number for the Class S of SMTTFF is 811236-20-7.
The CUSIP number for Class S of SMMB is 811170-10-9.
The CUSIP number for Class AARP of SMMB is 811170-60-4.
The CUSIP number for the Class AARP of SHYTFF is 811170-703.
The CUSIP number for the Class S of SHYTFF is 811170-20-8.
Each Fund has a taxable year ending May 31.
Portfolio securities of each Fund and each series of SMT are held
separately, pursuant to a custodian agreement, by the Funds' custodian, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02101.
The firm of Willkie Farr & Gallagher is legal counsel for each Fund.
The name "Scudder Tax Free Trust" is the designation of the Trustees
for the time being under an Amended and Restated Declaration of Trust dated
December 8, 1987 and the name "Scudder Municipal Trust" is the designation of
the Trustees for the time being under an Amended and Restated Declaration of
Trust dated December 11, 1987, each as amended from time to time, and all
persons dealing with a Fund must look solely to the property of that Fund for
the enforcement of any claims against that Fund as neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of a Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by a Fund's Declaration of Trust, as amended from
time to time. The Declaration of Trust of each Fund is on file at the
Massachusetts Secretary of State's Office in Boston, Massachusetts. All persons
dealing with a Fund must look only to the assets of that Fund for the
enforcement of any claims against such Fund as no other series of a Trust
assumes any liabilities for obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes each
Fund's net asset value. Prior to the implementation of the Administration
Agreements, SMTTFF and SMMB paid SFAC an annual fee equal to 0.024% of the first
$150 million of average daily net assets, 0.0070% of such assets in excess of
$150 million, 0.0040% of such assets in excess of $1 billion, plus holding and
transaction charges for this service. SHYTFF pays SFAC an annual fee equal to
0.024% of the first $150 million of average daily net assets, 0.0070% of such
assets in excess of $150 million, 0.0040% of such assets in excess of $1
billion, plus holding and transaction charges for this service. For the year
ended December 31, 1996, the amounts charged to SMTTFF, SMMB and SHYTFF by SFAC
61
<PAGE>
aggregated $91,551, $96,839 and $60,501, respectively. For the year ended
December 31, 1997, the amounts unpaid by SMTTFF, SMMB, and SHYTFF aggregated
$7,665, $8,012 and $5,500, respectively. For the year ended December 31, 1998,
the amounts charged to SMTTFF, SMMB and SHYTFF by SFAC aggregated $93,421,
$98,235 and $67,621, respectively. For the five-month period ended May 31, 1999,
the amount charged by SFAC to each Fund aggregated $38,815, $40,520 and $30,972,
of which $7,681, $8,079 and $6,308 was unpaid at May 31, 1999, respectively. For
the fiscal year ended May 31, 2000, the amount charged by SFAC to each Fund
aggregated $84,065, $103,967 and $76,576, of which $6,243, $7,740 and $10,469
was unpaid at May 31, 2000, respectively.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend disbursing agent for the Fund. Service Corporation also serves as
shareholder service agent and provides subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans. Prior
to the implementation of the Administration Agreements, SMTTFF and SMMB paid
Service Corporation an annual fee for each account maintained for a participant.
SHYTFF pays Service Corporation an annual fee for each account maintained for a
participant. SHYTFF or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of a Fund's shares whose interests are held in
an omnibus account. Service Corporation charged a total of $329,743 to SMMB for
the calendar year ended December 31, 1996. Service Corporation charged a total
of $292,138 to SHYTFF for the year ended December 31, 1996. Service Corporation
charged a total of $406,238 to SMTTFF for the year ended December 31, 1996.
Service Corporation charged a total of $329,430 to SMMB for the calendar year
ended December 31, 1997. Service Corporation charged a total of $287,904 to
SHYTFF for the year ended December 31, 1997. Service Corporation charged
$382,526 to SMTTFF for the year ended December 31, 1997. Service Corporation
charged a total of $316,492 to SMMB for the calendar year ended December 31,
1998. Service Corporation charged a total of $312,600 to SHYTFF for the year
ended December 31, 1998. Service Corporation charged $347,239 to SMTTFF for the
year ended December 31, 1998. A total of $125,396 was charged by Service
Corporation to SMMB for the five-month period ended May 31, 1999, and $333,002
for the fiscal year ended May 31, 2000, of which $26,653 was unpaid at May 31,
2000. Service Corporation charged a total of $127,716 to SHYTFF for the
five-month period ended May 31, 1999. Service Corporation charged a total of
$135,451 to SMTTFF for the five-month period ended May 31, 1999. Service
Corporation charged a total of $296,632 to SHYTFF for the fiscal year ended May
31, 2000, of which $19,495 was unpaid at May 31, 2000. Service Corporation
charged a total of $304,605 to SMTTFF for the fiscal year ended May 31, 2000, of
which $25,663 was unpaid at May 31, 2000. The Funds, or the Adviser (including
any affiliate of the Adviser), or both, may pay unaffiliated third parties for
providing recordkeeping and other administrative services with respect to
accounts of participants in retirement plans or other beneficial owners of Fund
shares whose interests are held in an omnibus account.
Scudder Trust Company, an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by the Fund
to Scudder Trust Company, Two International Place, Boston, Massachusetts
02110-4103 for such accounts. Prior to the implementation of the Administration
Agreements, SMTTFF and SMMB paid Scudder Trust Company an annual fee of $17.55
per shareholder account. SHYTFF pays Scudder Trust Company an annual fee of
$17.55 per shareholder account.
The Funds' prospectuses and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which each Trust has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statements and their
amendments for further information with respect to the Funds and the securities
offered hereby. The Registration Statements and their amendments are available
for inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder Medium Term Tax Free Fund
The financial statements, including the investment portfolio of Scudder
Medium Term Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
62
<PAGE>
reference to the Annual Report to the Shareholders of the Fund dated May 31,
2000, and are hereby deemed to be part of this Statement of Additional
Information.
Scudder Managed Municipal Bonds
The financial statements, including the investment portfolio of Scudder
Managed Municipal Bonds, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference to the Annual Report to the Shareholders of the Fund dated May 31,
2000 and are hereby deemed to be part of this Statement of Additional
Information.
Scudder High Yield Tax Free Fund
The financial statements, including the investment portfolio of Scudder
High Yield Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference to the Annual Report to the Shareholders of the Fund dated May 31,
2000, and are hereby deemed to be part of this Statement of Additional
Information.
63
<PAGE>
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high grade bonds.
Together with securities rated A and Baa, they comprise investment grade
securities. Moody's states that Aa bonds are rated lower than the best bonds
because margins of protection or other elements make long-term risks appear
somewhat larger than for Aaa municipal bonds. Municipal bonds which are rated A
by Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A rated municipal bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Securities rated Baa are considered medium grade, with factors giving security
to principal and interest adequate at present but may be unreliable over any
period of time. Such bonds have speculative elements as well as investment grade
characteristics. Securities rated Ba or below by Moody's are considered below
investment grade. Moody's judges municipal bonds rated Ba to have speculative
elements, with very moderate protection of interest and principal payments and
thereby not well safeguarded under any future conditions. Municipal bonds rated
B by Moody's generally lack characteristics of desirable investments. Long-term
assurance of the contract terms of B-rated municipal bonds, such as interest and
principal payments, may be small. Securities rated Ba or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High grade), A (Good grade), BBB (Investment grade), BB (Below investment
grade) and B. Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions. Bonds rated BBB have an adequate capacity to pay interest
and to repay principal. Adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds of this category than for bonds of higher rated categories.
Securities rated BB or below by S&P are considered below investment grade. Debt
rated BB by S&P faces major ongoing uncertainties or exposure to adverse
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Municipal bonds rated B have a greater vulnerability to
default but currently have the capacity to meet interest payments and principal
repayments. Securities rated BB or below are commonly referred to as "junk"
bonds and as such they carry a high margin of risk.
S&P's top ratings for municipal notes are SP1 and SP2. The designation
SP1 indicates a very strong capacity to pay principal and interest. A "+" is
added for those issues determined to possess overwhelming safety
characteristics. An SP2 designation indicates a satisfactory capacity to pay
principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A,
BBB, BB and B. Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F1+. Bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
64
<PAGE>
below investment grade is higher than for bonds with higher ratings. Securities
rated BB or below by Fitch are considered below investment grade. Fitch
considers bonds rated BB to be speculative because the issuer's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, although financial alternatives can be identified to assist the issuer
in meeting its obligations. While bonds rated B are currently meeting debt
service requirements, they are considered highly speculative in light of the
issuer's limited margin of safety. Securities rated BB or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Commercial Paper Ratings
Commercial paper rated A1 or better by S&P has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
Recently comparatively short-term obligations have been introduced in
the municipal market. S&P, Moody's and Fitch rate such obligations. While the
factors considered in municipal credit evaluations differ somewhat from those
relevant to corporate credits, the rating designations and definitions used with
respect to such obligations by S&P and Moody's are the same, respectively, as
those used in their corporate commercial paper ratings.
Glossary
0 Bond
A contract by an issuer (borrower) to repay the owner of the
contract (lender) the face amount of the bond on a specified
date (maturity date) and to pay a stated rate of interest
until maturity. Interest is generally paid semiannually in
amounts equal to one half the annual interest rate.
1 Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types
of securities which evidence a debt.
2 Discount and Premium
(a) Market Discount and Premium
A discount (premium) bond is a bond selling in the market at a
price lower (higher) than its face value. The amount of the
market discount (premium) is the difference between market
price and face value.
(b) Original Issue Discount
65
<PAGE>
An original issue discount is the discount from face value at
which the bond is first offered to the public.
0 Face Value
The value of a bond that appears on the face of the bond,
unless the value is otherwise specified by the issuing
company. Face value is ordinarily the amount the issuing
company promises to pay at maturity. Face value is not an
indication of market value.
1 Liquidation
The process of converting securities or other property into
cash.
2 Maturity
The date on which the principal amount of a debt obligation
comes due by the terms of the instrument.
3 Municipal Security
Securities issued by or on behalf of states, territories and
possessions of the United States, their political
subdivisions, agencies and instrumentalities and the District
of Columbia and other issuers, the interest from which is, at
the time of issuance in the opinion of bond counsel for the
issuers, exempt from federal income tax, except for the
applicability of the AMT.
4 Net Asset Value Per Share
The value of each share of each Fund for purposes of sales and
redemptions.
5 Net Investment Income
The net investment income of a Fund is comprised of its
interest income, including accretion of original issue
discounts, less amortization of premiums and expenses paid or
accrued computed under Generally Accepted Accounting
Principles (GAAP).
6 Par Value
Par value of a bond is a dollar amount representing the
denomination and assigned value of the bond. It signifies the
dollar value on which interest on the bonds is computed and is
usually the same as face value and maturity value for an
individual bond. For example, most bonds are issued in $1,000
denominations and they have a face value, maturity value and
par value of $1,000. Their market price can of course vary
significantly from $1,000 during their life between issuance
and maturity.
7 Series
SMT is composed of two series: SMMB and SHYTFF. Each Series is
distinct from the other, although both SMMB and SHYTFF are
combined in one investment company -- SMT.
SMTTFF is in one investment company -- STFT.
66
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
October 1, 2000
SCUDDER HIGH YIELD TAX FREE FUND (Class A, B and C shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B and Class C shares (the
"Shares") of Scudder High Yield Tax Free Fund (the "Fund"), a diversified series
of Scudder Municipal Trust (the "Trust"), an open-end management investment
company. It should be read in conjunction with the prospectus of the Shares
dated October 1, 2000. The prospectus may be obtained without charge from the
Fund at the address or telephone number on this cover or the firm from which
this Statement of Additional Information was received.
Scudder High Yield Tax Free Fund offers the following classes of shares:
Class AARP and Class S shares, and Class A, Class B and Class C shares (the
"Shares"). Only Class A, Class B and Class C shares of Scudder High Yield Tax
Free Fund are offered herein.
TABLE OF CONTENTS
Investment Restrictions.......................................................2
Investment Policies and Techniques............................................3
Dividends, Distributions and Taxes...........................................15
Performance..................................................................20
Investment Manager and Underwriter...........................................22
Portfolio Transactions.......................................................27
Purchase, Repurchase and Redemption of Shares................................29
Purchase of Shares...........................................................29
Redemption or Repurchase of Shares...........................................34
Special Features.............................................................37
Officers and Trustees........................................................41
Shareholder Rights...........................................................45
Scudder Kemper Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's May 31, 2000 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund accompanies this document.
<PAGE>
Investment Restrictions
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a "majority" of its outstanding voting Shares. As
defined in the Investment Company Act of 1940, as amended, (the "1940 Act"),
this means the lesser of (1) 67% of the Fund's Shares present at a meeting where
more than 50% of the outstanding Shares are present in person or by proxy; or
(2) more than 50% of the Fund's outstanding Shares.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an open-end
management investment company.
The Fund may not, as a fundamental policy:
1. borrow money, except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time;
2. issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time;
3. concentrate its investments in a particular industry, as that term is used
in the 1940 Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
4. engage in the business of underwriting securities issued by others, except
to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;
5. purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of the Fund's
ownership of securities;
6. purchase physical commodities or contracts relating to physical
commodities; or
7. make loans to other persons, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
Additionally, as a matter of fundamental policy, the Fund will:
8. have at least 80% of its net assets invested in municipal securities during
periods of normal market conditions.
With respect to fundamental policy (8) above, the Fund, does not consider any
investments in municipal obligations that pay interest subject to the
alternative minimum tax as part of the 80% of the Fund's net assets that must be
invested in municipal securities.
Other Investment Policies
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of nonfundamental policy, the Fund currently does not intend to:
1. borrow money in an amount greater than 5% of its total assets, except (i)
for temporary or emergency purposes;
2. purchase securities on margin or make short sales, except (i) short sales
against the box, (ii) in connection with arbitrage transactions, (iii) for
margin deposits in connection with futures contracts, options or other
permitted investments, (iv) that transactions in futures contracts and
options shall not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be necessary for
the clearance of securities transactions;
3. purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets;
2
<PAGE>
4. enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit;
5. purchase warrants if as a result, such securities, taken at the lower of
cost or market value, would represent more than 5% of the value of the
Fund's total assets (for this purpose, warrants acquired in units or
attached to securities will be deemed to have no value); and
6. lend portfolio securities in an amount greater than 5% of its total assets.
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the Securities and Exchange Commission (the "SEC") that permits the Fund to
participate in an interfund lending program among certain investment companies
advised by the Advisor. The interfund lending program allows the participating
funds to borrow money from and loan money to each other for temporary or
emergency purposes. The program is subject to a number of conditions designed to
ensure fair and equitable treatment of all participating funds, including the
following: (1) no fund may borrow money through the program unless it receives a
more favorable interest rate than a rate approximating the lowest interest rate
at which bank loans would be available to any of the participating funds under a
loan agreement; and (2) no fund may lend money through the program unless it
receives a more favorable return than that available from an investment in
repurchase agreements and, to the extent applicable, money market cash sweep
arrangements. In addition, a Fund may participate in the program only if and to
the extent that such participation is consistent with the fund's investment
objectives and policies (for instance, money market funds would normally
participate only as lenders and tax exempt funds only as borrowers). Interfund
loans and borrowings may extend overnight, but could have a maximum duration of
seven days. Loans may be called on one day's notice. A Fund may have to borrow
from a bank at a higher interest rate if an interfund loan is called or not
renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional costs. The program is subject to the
oversight and periodic review of the Boards of the participating funds. To the
extent the Fund is actually engaged in borrowing through the interfund lending
program, the Fund, as a matter of non-fundamental policy, may not borrow for
other than temporary or emergency purposes (and not for leveraging), except that
the Fund may engage in reverse repurchase agreements and dollar rolls for any
purpose.
Investment Policies and Techniques
General. The Fund seeks to provide a high level of income exempt from regular
federal income tax.
The Fund will invest at least 50% of its total assets in municipal bonds rated,
at the time of purchase, within the four highest quality rating categories of
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard &
Poor's Ratings Services ("S&P") or Fitch Investors Service, Inc. ("Fitch") (AAA,
AA, A or BBB), or their equivalents as determined by the Advisor. The Fund may
invest, however, up to 50% of its total assets in bonds rated below Baa by
Moody's or below BBB by S&P or Fitch, or unrated securities considered to be of
equivalent quality. The Fund may not invest in bonds rated below B by Moody's,
S&P or Fitch, or their equivalent. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Advisor will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
During the fiscal period ended May 31, 2000, the average monthly dollar-weighted
market value of the bonds in the Fund's portfolio was rated as follows: 31% AAA,
5% AA, 12% A, 21% BBB and 31% unrated. The bonds are rated by Moody's, S&P, or
3
<PAGE>
of equivalent quality as determined by the Advisor. A large portion of the
Fund's bond holdings may trade at substantial discounts from face value.
High quality bonds, those within the two highest quality rating categories,
characteristically have a strong capacity to pay interest and repay principal.
Medium-grade bonds, those within the next two such categories, are defined as
having adequate capacity to pay interest and repay principal. Lower-grade bonds
(so-called "junk bonds"), those rated below Baa by Moody's or BBB by S&P or
Fitch, involve greater price variability and a higher degree of speculation with
respect to the payment of principal and interest. Although some have produced
higher yields in the past than the investment-grade bonds in which the Fund
primarily invests, lower-grade bonds are considered to be predominantly
speculative and, therefore, carry greater risk.
For temporary defensive purposes, the Fund may vary from its investment policies
during periods when the Advisor determines that it is advisable to do so because
of conditions in the securities markets or other economic or political
conditions. During such periods the Fund may temporarily invest up to 100% of
its assets in high-quality municipal securities and high-quality short-term
tax-exempt or taxable instruments. It is impossible to accurately predict how
long such alternative strategies may be utilized.
Investments. It is a fundamental policy, which may not be changed without a vote
of shareholders, that at least 80% of the Fund's net assets will normally be
invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio assets in municipal securities, the
interest income from which is, in the opinion of bond counsel, free from regular
federal income tax. These municipal securities are debt obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their subdivisions, agencies and instrumentalities.
Such municipal securities include municipal notes, which are generally used to
provide short-term capital needs, and have maturities of one year or less.
Municipal notes include Tax Anticipation Notes, Revenue Anticipation Notes and
Construction Loan Notes.
The Fund may also invest in municipal bonds, which meet longer-term capital
needs and generally have maturities of more than one year when issued. Municipal
bonds include general obligation bonds, revenue bonds, prerefunded bonds,
industrial development and pollution control bonds. General obligation bonds and
notes are secured by the issuer's pledge of its full faith, credit and taxing
power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source. The Fund may also invest in other municipal
securities such as variable rate demand instruments.
Although there is no current intention to do so, the Fund may invest more than
25% of its total 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 alternative minimum tax ("AMT")
bonds and the Fund's current intention not to invest in municipal securities
whose investment income is subject to regular federal income tax. For purposes
of the Fund's investment limitation regarding concentration of investments in
any one industry, industrial development or other private activity bonds
ultimately payable by companies within the same industry will be considered as
if they were issued by issuers in the same industry.
Under normal market conditions, the Fund expects to invest principally in
municipal securities with long-term maturities (i.e., more than 10 years). The
Fund has the flexibility, however, to invest in municipal securities with short-
and medium-term maturities as well. The Fund may invest more than 20% of its
total assets in taxable securities to meet temporary liquidity requirements.
The Fund may also invest in stand-by commitments and other puts, repurchase
agreements, municipal lease obligations, variable rate demand instruments and
when-issued or forward delivery securities and may also engage in strategic
transactions.
The Fund's distributions from interest on certain municipal securities may be
subject to the alternative minimum tax depending upon investors' particular
situations. However, no more than 20% of the Fund's net assets will normally be
invested in municipal securities whose interest income, when distributed to
shareholders, is subject to the individual alternative minimum tax. In addition,
state and local taxes may apply, depending on your state tax laws.
Special Considerations
High Yield, High Risk Bonds. Below investment-grade debt securities (commonly
referred to as "junk bonds"), that is rated Ba and lower by Moody's and BB and
lower by S&P or unrated securities of equivalent quality, in which the Fund may
invest carry a high degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
The lower the ratings of such debt securities, the greater their risks. See the
4
<PAGE>
Appendix to this Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
High yield, high-risk securities are especially subject to adverse changes in
general economic conditions, to changes in the financial condition of their
issuers and to price fluctuations in response to changes in interest rates.
Economic downturns may disrupt the high yield market and impair the ability of
issuers to repay principal and interest. Also, an increase in interest rates
would likely have an adverse impact on the value of such obligations. During an
economic downturn or period of rising interest rates, highly leveraged issues
may experience financial stress which could adversely affect their ability to
service their principal and interest payment obligations. Prices and yields of
high yield securities will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely affect a Fund's
net asset value. In addition, investments in high yield zero coupon or
pay-in-kind bonds, rather than income-bearing high yield securities, may be more
speculative and may be subject to greater fluctuations in value due to changes
in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of a Fund
to accurately value high yield securities in the Fund's portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently- issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Advisor not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Advisor's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Advisor will determine
whether it is in the best interests of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. For example, federal rules require savings and loan
institutions to gradually reduce their holdings of this type of security. Also,
Congress has from time to time considered legislation which would restrict or
eliminate the corporate tax deduction for interest payments in these securities
and regulate corporate restructurings. Such legislation may significantly
depress the prices of outstanding securities of this type. For more information
regarding tax issues related to high yield securities, see "TAXES."
Specialized Investment Techniques
Municipal Securities. Municipal Securities are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on these obligations is generally exempt from federal
income tax in the hands of most investors, except for the possible applicability
of the alternative minimum tax. The two principal classifications of municipal
securities are "Notes" and "Bonds."
1. Municipal Notes. Municipal Notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal notes
include Tax Anticipation Notes; Revenue Anticipation Notes; Bond Anticipation
Notes and Construction Loan Notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds, which meet longer term capital needs and
generally have maturities of more than one year when issued, have two principal
classifications: "General Obligation" Bonds and "Revenue" Bonds.
5
<PAGE>
Issuers of General Obligation Bonds include states, counties, cities, towns and
regional districts. The proceeds of these obligations are used to fund a wide
range of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of General Obligation Bonds is the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Revenue Bonds
have been issued to fund a wide variety of capital projects including: electric,
gas, water and sewer systems; highways, bridges and tunnels; port and airport
facilities; colleges and universities; and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may also be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully insured,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without obligation) to make up deficiencies in the debt service reserve fund.
Lease rental revenue bonds issued by a state or local authority for capital
projects are secured by annual lease rental payments from the state or locality
to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of private
activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected. The Fund may invest more than 25% of its assets in industrial
development or other private activity bonds, subject to the Fund's fundamental
investment policies, and also subject to the Fund's current intention not to
invest in municipal securities whose investment income is taxable or AMT bonds,
or subject to the Fund's 20% limitation on investing in AMT bonds. For the
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.
3. Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover the Fund's original investment.
Participation interests represent undivided interests in municipal leases,
installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts. They may be variable or fixed rate.
Certain municipal lease obligations and participation interests may be deemed
illiquid for the purpose of the Fund's limitation on investments in illiquid
securities. Other municipal lease obligations and participation interests
acquired by the Fund may be determined by the Advisor to be liquid securities
for the purpose of such limitation. In determining the liquidity of municipal
lease obligations and participation interests, the Advisor will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace in which the security
6
<PAGE>
trades. In addition, the Advisor will consider factors unique to particular
lease obligations and participation interests affecting the marketability
thereof. These include the general creditworthiness of the issuer, the
importance to the issuer of the property covered by the lease and the likelihood
that the marketability of the obligation will be maintained throughout the time
the obligation is held by the Fund.
The Fund may purchase participation interests in municipal lease obligations
held by a commercial bank or other financial institution. Such participations
provide the Fund with the right to a pro rata undivided interest in the
underlying municipal lease obligations. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of the Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. The Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Advisor, the
interest from such participations is exempt from regular federal income tax and
state income tax, if applicable.
Short term securities. The Fund may purchase from banks participation interests
in all or part of specific holdings of municipal obligations, provided the
participation interest is fully insured. Each participation is backed by an
irrevocable letter of credit or guarantee of the selling bank that the Adviser
has determined meets the prescribed quality standards of the Fund. Therefore,
either the credit of the issuer of the municipal obligation or the selling bank,
or both, will meet the quality standards of the Fund. The Fund has the right to
sell the participation back to the bank after seven days' notice for the full
principal amount of the Fund's interest in the municipal obligation plus accrued
interest, but only (i) as required to provide liquidity to the Fund, (ii) to
maintain a high quality investment portfolio or (iii) upon a default under the
terms of the municipal obligation. The selling bank will receive a fee from the
Fund in connection with the arrangement. The Fund will not purchase
participation interests unless in the opinion of bond counsel, counsel for the
issuers of such participations or counsel selected by the Adviser, the interest
from such participations is exempt from regular federal income tax and state
income tax, if applicable, for the Fund.
4. Other Municipal Securities. There is, in addition, a variety of hybrid and
special types of municipal securities as well as numerous differences in the
security of municipal securities both within and between the two principal
classifications above.
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit a Fund to demand payment of the unpaid principal balance
plus accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument. The Fund intends to exercise
the demand only (1) upon a default under the terms of the municipal obligation,
(2) as needed to provide liquidity to the Fund, or (3) to maintain a high
quality investment portfolio or (4) to maximize the Fund's yield. A bank that
issues a repurchase commitment may receive a fee from a Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that a Fund may purchase are payable on
demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Fund will
determine the variable rate demand instruments that they will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Advisor may determine that an unrated variable rate demand instrument meets
a Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of a Fund. The Advisor will
reevaluate each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet the Fund's quality
criteria.
The interest rate of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should decrease changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with a comparable portfolio of fixed income
securities. The Fund may purchase variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value of such variable rate
demand notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed interest
7
<PAGE>
rate securities. Accordingly, interest rates on the variable rate demand
instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities.
The maturity of the variable rate demand instruments held by the Fund will
ordinarily be deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
5. General Considerations. An entire issue of Municipal Securities may be
purchased by one or a small number of institutional investors such as the Fund.
Thus, the issue may not be said to be publicly offered. Unlike securities which
must be registered under the Securities Act of 1933, as amended (the "1933 Act")
prior to offer and sale unless an exemption from such registration is available,
municipal securities that are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal securities that were not
publicly offered initially.
Securities purchased for The Fund are subject to the limitations on holdings of
securities that are not readily marketable contained in the Fund's investment
restrictions. The Advisor determines whether a municipal security is readily
marketable based on whether it may be sold in a reasonable time consistent with
the customs of the municipal markets (usually seven days) at a price (or
interest rate) which accurately reflects its value. The Advisor believes that
the quality standards applicable to the Fund's investments enhance
marketability. In addition, Stand-by Commitments and demand obligations also
enhance marketability.
For the purpose of the Fund's investment restrictions, the identification of the
"issuer" of municipal securities which are not General Obligation Bonds is made
by the Advisor on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
The Fund expects that it will not invest more than 25% of its total assets in
municipal securities whose issuers are located in the same state or more than
25% of its total assets in municipal securities the security of which is derived
from any one of the following categories: hospitals and health facilities;
turnpikes and toll roads; ports and airports; or colleges and universities. The
Fund may invest more than 25% of its total assets in municipal securities of one
or more of the following types: public housing authorities; general obligations
of states and localities; lease rental obligations of states and local
authorities; state and local housing finance authorities; municipal utilities
systems; bonds that are secured or backed by the Treasury or other U.S.
Government guaranteed securities; or industrial development and pollution
control bonds. There could be economic, business or political developments,
which might affect all municipal securities of a similar type. However, the Fund
believes that the most important consideration affecting risk is the quality of
particular issues of municipal securities rather than factors affecting all, or
broad classes of, municipal securities.
When-Issued or Forward Delivery Securities. The Fund may purchase securities
offered on a "when-issued" or "forward delivery" basis. When so offered, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by the purchaser to the
issuer and no interest on the when-issued or forward delivery security accrues
to the purchaser. To the extent that assets of a Fund are not invested prior to
the settlement of a purchase of securities, that Fund will earn no income;
however, it is intended that the Fund will be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, it is
intended that the Fund will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Fund
does not believe that the net asset value or income of their portfolios will be
adversely affected by their purchase of securities on a when-issued or forward
delivery basis. The Fund will establish with its custodian a segregated account
in which it will maintain cash or liquid assets, equal in value to commitments
for when-issued or forward delivery securities. Such segregated securities may
mature or be sold, if necessary, on or before the settlement date. The Fund will
not enter into such transactions for leverage purposes.
Stand-by Commitments. The Fund may engage in Stand-by Commitments. The Fund may
engage in such transactions subject to the limitations in the rules under the
1940 Act. A Stand-by Commitment is a right acquired by a Fund, when it purchases
a municipal security from a broker, dealer or other financial institution
("seller"), to sell up to the same principal amount of such securities back to
the seller, at that Fund's option, at a specified price. Stand-by Commitments
are also known as "puts." The Fund's investment policies permit the acquisition
of Stand-by Commitments solely to facilitate portfolio liquidity. The exercise
8
<PAGE>
by the Fund of a Stand-by Commitment is subject to the ability of the other
party to fulfill its contractual commitment.
Stand-by Commitments acquired by the Fund will have the following features: (1)
they will be in writing and will be physically held by the Fund's custodian; (2)
the Fund's rights to exercise them will be unconditional and unqualified; (3)
they will be entered into only with sellers which in the Advisor's opinion
present a minimal risk of default; (4) although Stand-by Commitments will not be
transferable, municipal securities purchased subject to such commitments may be
sold to a third party at any time, even though the commitment is outstanding;
and (5) their exercise price will be (i) the Fund's acquisition cost (excluding
the cost, if any, of the Stand-by Commitment) of the municipal securities which
are subject to the commitment (excluding any accrued interest which the Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date. Moreover, while there is little risk of an event
occurring which would make amortized cost valuation of its portfolio securities
inappropriate, if such condition developed, the securities may, in the
discretion of the Trustees, be valued on the basis of available market
information and held to maturity. The Fund expects to refrain from exercising a
Stand-by Commitment in the event that the amount receivable upon exercise of the
Stand-by Commitment is significantly greater than the then current market value
of the underlying municipal securities in order to avoid imposing a loss on a
seller and thus jeopardizing that Fund's business relationship with that seller.
The Fund expects that Stand-by Commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary or
advisable, the Fund will pay for Stand-by Commitments, either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to the commitments. As a matter of policy, the total amount "paid" by the Fund
in either manner for outstanding Stand-by Commitments will not exceed 1/2 of 1%
of the value of total assets of that Fund calculated immediately after any
Stand-by Commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential benefit of a
Stand-by Commitment. Therefore, it is expected that the Fund's Trustees will
determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. When the
Fund has paid for a Stand-by Commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held.
The Advisor understands that the Internal Revenue Service (the "Service") has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The Service has also
issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be
tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The Service has subsequently
announced that it will not ordinarily issue advance ruling letters as to the
identity of the true owner of property in cases involving the sale of securities
or participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. The Fund intends to take the position that it owns any
municipal obligations acquired subject to a Stand-by Commitment and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands. There is no assurance that the Service will agree with
such position in any particular case. There is no assurance that Stand-by
Commitments will be available to the Fund nor has the Fund assumed that such
commitments would continue to be available under all market conditions.
Third Party Puts. The Fund may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or trust certificates and may be combined with other features
such as interest rate swaps. The Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
The financial institution granting the option does not provide credit
enhancement, and in the event that there is a default in the payment of
principal or interest, or downgrading of a bond to below investment grade, or a
loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond.
These bonds coupled with puts may present the same tax issues as are associated
with Stand-by Commitments discussed above. As with any Stand-by Commitments
acquired by a Fund, the Fund intends to take the position that it is the owner
of any municipal obligation acquired subject to a third-party put, and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands. There is no assurance that the Service will agree with
such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
9
<PAGE>
of tender fees and swap payments, in relation to various regulated investment
company tax provisions is unclear. However, the Advisor intends to manage the
Fund's portfolios in a manner designed to minimize any adverse impact from these
investments.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Advisor to be at least
as high as that of other issuers of obligations the Fund may purchase or to be
at least equal to that of issuers of commercial paper rated within the two
highest grades assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a Fund) acquires a security ("obligation") and the seller
agrees, at the time of sale, to repurchase the obligation at a specified time
and price. The repurchase price may be higher than the purchase price, the
difference being income to a Fund, or the purchase and repurchase prices may be
the same, with interest at a stated rate due to a Fund together with the
repurchase price upon repurchase. In either case, the income to a Fund (which is
taxable) is unrelated to the interest rate on the obligation itself. Obligations
will be physically held by the custodian or in the Federal Reserve Book Entry
system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
a Fund to the seller of the obligation subject to the repurchase agreement and
is therefore subject to that Fund's investment restriction applicable to loans.
It is not clear whether a court would consider the obligation purchased by a
Fund subject to a repurchase agreement as being owned by that Fund or as being
collateral for a loan by that Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the obligation before repurchase of the obligation under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
obligation. If the court characterized the transaction as a loan and a Fund has
not perfected a security interest in the obligation, that Fund may be required
to return the obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at the risk of
losing some or the entire principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Advisor seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the obligation, in which case a Fund
may incur a loss if the proceeds to that Fund from the sale to a third party are
less than the repurchase price. However, if the market value of the obligation
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund involved will direct the seller of the obligation
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement will equal or exceed the repurchase price.
It is possible that a Fund will be unsuccessful in seeking to impose on the
seller a contractual obligation to deliver additional securities.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time. While the Trustees
do not currently intend to borrow for investment leverage purposes, if such a
strategy were implemented in the future it would increase the Fund's volatility
and the risk of loss in a declining market. Borrowing by the Fund will involve
special risk considerations. Although the principal of the Fund's borrowings
will be fixed, the Fund's assets may change in value during the time a borrowing
is outstanding, thus increasing exposure to capital risk.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio, or enhancing potential gain. These
strategies may be executed through the use of derivative contracts.
In the course of pursuing these investment strategies, the 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 futures contracts and options thereon, and enter into various transactions
such as swaps, caps, floors or collars (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (except to the
extent that 80% of the Fund's net assets are required to be invested in
tax-exempt municipal securities, and as limited by the Funds' other investment
restrictions and subject to certain limits imposed by the 1940 Act) to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund's portfolio resulting from securities markets
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
10
<PAGE>
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 the Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of 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 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 use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
11
<PAGE>
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
12
<PAGE>
Fund will not sell put options if, as a result, more than 50% of the Fund's
total assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the 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 Advisor'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.
13
<PAGE>
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the 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. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and 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.
The 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 the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the 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. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the 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.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid assets
denominated in that currency equal to the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
14
<PAGE>
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Illiquid Securities. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted or illiquid securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Fund's net assets.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; or (iii) in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration. Issuers of restricted securities may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Dividends, Distributions and Taxes
Dividends. The Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment after paying the
related federal income taxes for which the shareholders may then be asked to
claim a credit against their federal income tax liability. (See "Taxes"
hereafter.)
If the Fund does not distribute an amount of capital gain and/or ordinary income
required to be distributed by an excise tax provision of the Code, it may be
subject to such tax. (See "Taxes" hereafter.) In certain circumstances, the Fund
may determine that it is in the interest of shareholders to distribute less than
such an amount.
Earnings and profits distributed to shareholders on redemptions of Fund shares
may be utilized by the Fund, to the extent permissible, as part of the Fund's
dividend paid deduction on its federal tax return.
15
<PAGE>
Dividends will be declared daily and distributions of net investment income will
be made monthly on the fourth business day of each month for the preceding
month's net income. Distributions of realized capital gains, if any, are paid in
November or December, although an additional distribution may be made within
three months of the Fund's fiscal year end, if necessary, and the Fund expects
to continue to distribute net capital gains at least annually. Both types of
distributions will be made in shares of that Fund and confirmations will be
mailed to each shareholder unless a shareholder has elected to receive cash, in
which case a check will be sent.
A brief explanation of the form and character of the distribution accompany each
distribution. The characterization of distributions on such correspondence may
differ from the characterization for federal tax purposes. In January of each
year the Fund issues to each shareholder a statement of the federal income tax
status of all distributions in the prior calendar year.
Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C shares than for Class A shares primarily as a result of
the distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same proportion for
each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
1. To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
2. To receive income and capital gain dividends in cash.
Dividends will be reinvested in Shares of the same class of the Fund unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Scudder Funds with multiple classes of shares or Kemper Funds as
provided in the prospectus. See "Special Features -- Class A shares -- Combined
Purchases" for a list of such other Funds. To use this privilege of investing
dividends of the Fund in shares of another Scudder or Kemper Fund, shareholders
must maintain a minimum account value of $1,000 in the Fund distributing the
dividends. The Fund will reinvest dividend checks (and future dividends) in
shares of that same Fund and class if checks are returned as undeliverable.
Dividends and other distributions of the Fund in the aggregate amount of $10 or
less are automatically reinvested in shares of the Fund unless the shareholder
requests that such policy not be applied to the shareholder's account.
Taxes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. It intends to continue to qualify for such treatment.
Such qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends-received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund. As of May 31, 2000, the
Fund had a net tax basis capital loss carryforward of approximately $6,600,000,
16
<PAGE>
which may be applied against any realized net taxable capital gains of each
succeeding year until fully utilized or until May 31, 2005 ($3,900,000) and May
31, 2008 ($2,700,000), the respective expiration dates, whichever occurs first.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the Fund on such
gains as a credit against personal federal income tax liability, and will be
entitled to increase the adjusted tax basis on Fund shares by the difference
between such reported gains and the individual tax credit.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are not expected to comprise a substantial
part of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares of the Fund
with respect to which the dividends are received are treated as debt-financed
under federal income tax law, and is eliminated if either those shares or the
shares of the Fund are deemed to have been held by the Fund or the shareholder,
as the case may be, for less than 46 days during the 90-day period beginning 45
days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
In some cases, shareholders of the Fund will not be permitted to take all or
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term "reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Kemper fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A single individual who is not an active participant in an employer-maintained
retirement plan, such as a pension or profit sharing plan, a governmental plan,
a simplified employee pension plan, a simple retirement account, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. If an individual is an active participant, the deductibility of his or
her IRA contributions in 2000 is phased out if the individual has gross income
between $32,000 and $42,000 and is single, if the individual has gross income
17
<PAGE>
between $52,000 and $62,000 and is married filing jointly, or if the individual
has gross income between $0 and $10,000 and is married filing separately; the
phase-out ranges for individuals who are single or married filing jointly are
subject to annual adjustment through 2005 and 2007, respectively. If an
individual is married filing jointly and the individual's spouse is an active
participant but the individual is not, the deductibility of his or her IRA
contributions is phased out if their combined gross income is between $150,000
and $160,000. Whenever the adjusted gross income limitation prohibits an
individual from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions. There are
special rules for determining how withdrawals are to be taxed if an IRA contains
both deductible and nondeductible amounts. In general, a proportionate amount of
each withdrawal will be deemed to be made from nondeductible contributions;
amounts treated as a return of nondeductible contributions will not be taxable.
An eligible individual may contribute as much as $2,000 of qualified income
(earned income or, under certain circumstances, alimony) to an IRA each year (up
to $2,000 per individual for married couples, even if only one spouse has earned
income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Investments by a Fund in zero coupon or other original issue discount securities
(other than tax-exempt securities) will result in income to the Fund equal to a
portion of the excess of the face value of the securities over their issue price
(the "original issue discount") each year that the securities are held, even
though the Fund receives no cash interest payments. This income is included in
determining the amount of income which a Fund must distribute to maintain its
status as a regulated investment company and to avoid the payment of federal
income tax and the 4% excise tax.
If the Fund invests in certain high yield original issue discount obligations
issued by corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Fund by its corporate shareholders, to the extent attributable
to such portion of accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated by the Fund in
a written notice to shareholders.
Under the Code, a shareholder may not deduct that portion of interest on
indebtedness incurred or continue to purchase or carry shares of an investment
company paying exempt interest dividends (such as those of the Tax Free Money
Fund) which bears the same ratio to the total of such interest as the
exempt-interest dividends bear to the total dividends (excluding net capital
gain dividends) received by the shareholder. In addition, under rules issued by
the Internal Revenue Service for determining when borrowed funds are considered
to be used to purchase or carry particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to such purchase.
Over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in the Fund's portfolio. If
the Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
the Fund is not a taxable transaction for the Fund.
18
<PAGE>
Many futures contracts entered into by the Fund will be governed by Section 1256
of the Code. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such position generally will be
treated as 60% long-term and 40% short-term capital gain or loss, and on the
last trading day of the Fund's fiscal year, all outstanding Section 1256
positions will be marked to market (i.e., treated as if such positions were
closed out at their closing price on such day), with any resulting gain or loss
recognized as 60% long-term and 40% short-term. Under certain circumstances,
entry into a futures contract to sell a security may constitute a short sale for
federal income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
Positions of the Fund which consist of at least one stock and at least one other
position with respect to a related security which substantially diminishes the
Fund's risk of loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of which may cause
deferral of losses, adjustments in the holding periods of stock or securities
and conversion of short-term capital losses into long-term capital losses. An
exception to these straddle rules exists for certain "qualified covered call
options" on stock written by the Fund.
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or non-equity option
governed by Section 1256 which substantially diminishes the Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The Fund intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
In some cases, shareholders of the Fund will not be permitted to take all or
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term "reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
The Fund will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares. A
brief explanation of the form and character of the distribution accompany each
19
<PAGE>
distribution. In January of each year the Fund issues to each shareholder a
statement of the federal income tax status of all distributions. In many states,
Fund distributions which are derived from interest on certain U.S. Government
obligations are exempt from taxation. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund. Persons who may be "substantial users" (or "related
persons" of substantial users) of facilities financed by industrial development
bonds should consult their tax advisers before purchasing shares of the Fund.
The term "substantial user" generally includes any "non-exempt person" who
regularly uses in his or her trade or business a part of a facility financed by
industrial development bonds. Generally, an individual will not be a "related
person" of a substantial user under the Code unless the person or his or her
immediate family owns directly or indirectly in the aggregate more than a 50%
equity interest in the substantial user.
The Fund is organized as a series of a Massachusetts business trust and is not
liable for any income or franchise tax in the Commonwealth of Massachusetts,
provided that it qualifies as a regulated investment company for federal income
tax purposes.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
Performance
The Shares' historical performance or return for a class of Shares may be shown
in the form of "average annual total return" and "total return" figures. These
measures of performance are described below. Performance information will be
computed separately for each class. The Advisor has agreed to a reduction of its
management fee for the Fund to the extent specified in the prospectus. See
"Investment Manager and Underwriter." This fee reduction will improve the
performance results of the Fund.
The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for each of Class A, Class B and Class C
shares. Each of these figures is based upon historical results and is not
representative of the future performance of any class of the Fund.
There may be quarterly periods following the periods reflected in the
performance bar chart in the Fund's prospectus which may be higher or lower than
those included in the bar chart.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for the Fund's financial statements and prospectus. Total
return performance for a specific period is calculated by first taking a
hypothetical investment ("initial investment") in the shares of a class of the
Fund's shares on the first day of the period, either adjusting or not adjusting
to deduct the maximum sales charge (in the case of Class A shares), and
computing the "ending value" of that investment at the end of the period. The
total return percentage is then determined by subtracting the initial investment
from the ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The ending value in the case of Class B
shares or Class C shares may or may not include the effect of the applicable
contingent deferred sales charge that may be imposed at the end of the period.
The calculation assumes that all income and capital gains dividends paid by the
Fund have been reinvested at net asset value per share on the reinvestment dates
during the period. Total return may also be shown as the increased dollar value
of the hypothetical investment over the period. Total return calculations that
do not include the effect of the sales charge for Class A shares or the
contingent deferred sales charge for Class B and Class C shares would be reduced
if such charges were included.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of, the underlying investments in the Fund's portfolio. The
Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the SEC. The average annual total
return for each class of the Fund for a specific period is found by first taking
a hypothetical $1,000 investment ("initial investment") in the class' Shares on
the first day of the period, adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "redeemable value" of that
investment at the end of the period. Average annual return quotations will be
20
<PAGE>
determined to the nearest 1/100th of 1%. The redeemable value in the case of
Class B shares or Class C shares include the effect of the applicable contingent
deferred sales charge that may be imposed at the end of the period. The
redeemable value is then divided by the initial investment, and this quotient is
taken to the Nth root (N representing the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. Average
annual return calculated in accordance with this formula does not take into
account any required payments for federal or state income taxes. Such quotations
for Class B shares for periods over six years will reflect conversion of such
Shares to Class A shares at the end of the sixth year. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Average annual total return may also be calculated in a manner not consistent
with the standard formula described above, without deducting the maximum sales
charge or contingent deferred sales charge.
The Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. The Fund's Class A shares are
sold at net asset value plus a maximum sales charge of 4.50% of the offering
price. Class B and Class C shares are sold at net asset value. Redemption of
Class B shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
each year thereafter and becomes zero after six years. Redemption of Class C
shares may be subject to a 1% contingent deferred sales charge in the first year
following the purchase. Returns and net asset value will fluctuate. Factors
affecting the Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices which are described herein.
The Consumer Price Index is generally considered to be a measure of inflation.
The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index are
indices of common stocks which are considered to be generally representative of
the U.S. stock market. The Financial Times/Standard & Poor's Actuaries World
Index-Europe(TM) is a managed index that is generally representative of the
equity securities of European markets. The foregoing indices are unmanaged. The
net asset value and returns of a Fund will fluctuate.
Investors may want to compare the performance of the Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC/Donoghue's Money Fund Averages(R)
(All Taxable). As reported by IBC/Donoghue's, all investment results represent
total return (annualized results for the period net of management fees and
expenses) and one year investment results are effective annual yields assuming
reinvestment of dividends.
Performance figures for Class A, B and C shares for the period May 1, 2000
(commencement of operations of Class A, B and C shares) to May 31, 2000 reflect
the actual performance of this class of shares. Returns for Class A, B and C
shares for the period December 31, 1990 to May 31, 2000 are derived from the
historical performance of Class S shares, adjusted to reflect the operating
expenses applicable to Class A, B and C shares, which may be higher or lower
than those of Class S shares. The performance figures are also adjusted to
reflect the maximum sales charge of 4.50% for Class A shares and the maximum
21
<PAGE>
current contingent deferred sales charge of 4% for Class B shares and 1% for
Class C shares.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of the Fund as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Returns^ +
<TABLE>
<CAPTION>
For the period ended May 31, 2000* Class A** Class B** Class C** Class S**
---------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
One Year -5.72% -5.04% -2.11% -1.28%
Five Years 4.55% 4.43% 4.64% 5.52%
Ten Years 6.78% 6.37% 6.37% 7.27%
</TABLE>
* The Fund changed its fiscal year end from December 31 to May 31.
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total returns for each period would have been lower.
+ Because Class A, B and C shares were not introduced until May 1, 2000, the
total return for Class A, B and C shares for the period prior to their
introduction is based upon the performance of Class S shares from December
31, 1990 through May 31, 2000. Actual performance of Class A, B and C
shares is shown beginning May 1, 2000.
Investment Manager and Underwriter
Investment Manager. Scudder Kemper Investments, Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Fund. This organization, the predecessor of which is Scudder, Stevens &
Clark, Inc., ("Scudder") is one of the most experienced investment counsel firms
in the U. S. It was established as a partnership in 1919 and pioneered the
practice of providing investment counsel to individual clients on a fee basis.
In 1928 it introduced the first no-load mutual fund to the public. In 1953 the
Advisor introduced Scudder International Fund, Inc., the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The predecessor firm reorganized from a partnership
to a corporation on June 28, 1985. On June 26, 1997, Scudder entered into an
agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder and
Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in Scudder Kemper) and the financial services
businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders. The
Advisor manages the Fund's daily investment and business affairs subject to the
policies established by the Trust's Board of Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
22
<PAGE>
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
Pursuant to an investment management agreement with the Fund, the Advisor acts
as the Fund's investment advisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor receives published reports and
statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
The present investment management agreement (the "Agreement") will continue in
effect until September 30, 2001from year to year thereafter only if its
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreement or interested persons of the Advisor or the
Fund, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Trust's Trustees or of a majority of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice and automatically terminates in the event of its assignment.
Under the Agreement, the Advisor regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940
Act, the Code and to the Fund's investment objective, policies and restrictions,
and subject, further, to such policies and instructions as the Board of Trustees
of the Trust may from time to time establish. The Advisor also advises and
assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of the Fund.
Under the Agreement, the Advisor renders significant administrative services
(not otherwise provided by third parties) necessary for the Fund's operations as
an open-end investment company including, but not limited to, preparing reports
and notices to the Trustees and shareholders; supervising, negotiating
contractual arrangements with, and monitoring various third-party service
providers to the Fund (such as the Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns; preparing and filing the Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
23
<PAGE>
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
As of October 2, 2000, for the above services the Fund pays an annual rate of
0.65 of 1% on the first $300 million of average daily net assets and 0.60 of 1%
on the next $200 million, and 0.575 of 1% of average daily net assets exceeding
$500 million, payable monthly, provided the Fund will make such interim payments
as may be requested by the Advisor not to exceed 75% of the amount of the fee
then accrued on the books of the Fund and unpaid. Prior to October 2, 2000, for
the above services the Fund paid an annual rate of 0.65 of 1% on the first $300
million of average daily net assets and 0.60 of 1% on such net assets in excess
of $300 million, payable monthly.
For the years ended December 31, 1997 and 1998, fees incurred by the Fund
amounted to $2,050,368 and $2,440,931, respectively. For the five-month period
ended May 31, 1999, the fee amounted to $1,171,322. For the year ended May 31,
2000, the fee amounted to $2,690,614, which was equivalent to an annual
effective rate of 0.64% of the Fund's average daily net assets.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; any other expenses of issue, sale, underwriting,
distribution, redemption or repurchase of shares; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Fund who are not affiliated with the
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
24
<PAGE>
The term Scudder Investments is the designation given to the services provided
by Scudder Kemper Investments, Inc. and its affiliates to the Scudder Family of
Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Fund and employees of the Adviser and principal underwriter are permitted
to make personal securities transactions, including transactions in securities
that may be purchased or held by the Fund, subject to requirements and
restrictions set forth in the applicable Code of Ethics. The Adviser's Code of
Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
25
<PAGE>
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B shares and Class C shares. The Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis they will, over time, increase the cost of an investment and
cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class B shares. This fee is accrued daily as an
expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or a Fund. KDI also receives any
contingent deferred sales charges.
Administrative Services. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. The
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of Class A, B and C shares of the
Fund.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A shares, commencing with the month after
investment. With respect to Class B and Class C shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include affiliates of
KDI. In addition KDI may, from time to time, from its own resources pay certain
firms additional amounts for ongoing administrative services and assistance
provided to their customers and clients who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
26
<PAGE>
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future.
Certain trustees or officers of the Fund are also directors or officers of the
Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, 02110-4103, a subsidiary of the
Advisor, computes the Fund's net asset value. The Fund pays SFAC an annual fee
equal to 0.024% of the first $150 million of average daily net assets, 0.0070%
of such assets in excess of $150 million, 0.0040% of such assets in excess of $1
billion, plus holding and transaction charges for this service. For the year
ended December 31, 1997, the amounts unpaid by the Fund aggregated $5,500. For
the year ended December 31, 1998, the amounts charged to the Fund by SFAC
aggregated $67,621. For the five-month period ended May 31, 1999, the amount
charged by SFAC to the Fund aggregated $30,972. For the year ended May 31, 2000,
the amount charged by SFAC to the Fund aggregated $76,576, of which $10,469 was
unpaid at May 31, 2000.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. KSVC receives as transfer agent, annual account fees of $5 per
account, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement.
Experts
The financial highlights of the Fund included in the Fund's prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, One Post Office Square, Boston,
Massachusetts 02109, independent accounts, and given on the authority of that
firm as experts in accounting and auditing. Effective July 1, 1998, Coopers &
Lybrand L.L.P. and Price Waterhouse LLP merged to become PricewaterhouseCoopers
LLP. PricewaterhouseCoopers LLP is responsible for performing annual audits of
the financial statements and financial highlights of the Fund in accordance with
generally accepted auditing standards and the preparation of federal tax
returns.
Portfolio Transactions
Brokerage Commissions. Allocation of brokerage may be placed by the Advisor.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for the Fund's portfolio is to obtain the most favorable net
results taking into account such factors as price, commission where applicable,
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Advisor seeks to evaluate the overall reasonableness of
27
<PAGE>
brokerage commissions paid (to the extent applicable) through the familiarity of
Scudder Investor Services, Inc. ("SIS"), a corporation registered as a
broker-dealer and a subsidiary of the Advisor, with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Advisor reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Advisor is not authorized when placing portfolio transactions for the Fund
to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction solely on account of the receipt of
research, market or statistical information. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
In selecting among firms believed to meet the criteria for handling a particular
transaction, the Advisor may give consideration to those firms that have sold or
are selling shares of the Fund or other funds managed by the Advisor.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through SIS. SIS will place orders on behalf
of the Fund with issuers, underwriters or other brokers and dealers. SIS will
not receive any commission, fee or other remuneration from the Fund for this
service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
The Trustees of the Fund review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
The Fund's average portfolio turnover rate is the ratio of the lesser of sales
or purchases to the monthly average value of the portfolio securities owned
during the year, excluding all securities with maturities or expiration dates at
the time of acquisition of one year or less. A higher rate involves greater
brokerage transaction expenses to the Fund and may result in the realization of
net capital gains, which would be taxable to shareholders when distributed.
Purchases and sales are made for the Fund's portfolio whenever necessary, in
management's opinion, to meet the Fund's objective.
Portfolio Turnover
The portfolio turnover rate for the Fund (defined by the SEC as the ratio of the
lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities whose remaining maturities at
the time of acquisition were one year or less) for the years ended December 31,
1997 and 1998 were 33% and 14%, respectively. For the five months ended May 31,
1999, the portfolio turnover rate was 7% (annualized). For the year ended May
31, 2000, the portfolio turnover rate was 62%.
Net Asset Value
The net asset value of shares of the Fund is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for trading. The
Exchange is scheduled to be closed on the following holidays: New Year's Day,
Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share of each class of High Yield Tax Free Fund is computed by dividing the
value of the total assets attributable to shares of a class, less all
liabilities attributable shares of that class, by the total number of
outstanding shares of that class.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security that is traded on the Nasdaq Stock Market
("Nasdaq") system is valued at its most recent sale price. Lacking any sales,
28
<PAGE>
the security is valued at the most recent bid quotation. The value of an equity
security not quoted on the Nasdaq System, but traded in another over-the-counter
market, is its most recent sale price. Lacking any sales, the security is valued
at the Calculated Mean. Lacking a Calculated Mean, the security is valued at the
most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices supplied
by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations
and electronic data processing techniques. Short-term securities purchased with
remaining maturities of sixty days or less shall be valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Advisor may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
Purchase, Repurchase and Redemption of Shares
Fund Shares are sold at their public offering price, which is the net asset
value per such share next determined after an order is received in proper form
plus, with respect to Class A shares, an initial sales charge. The minimum
initial investment for Class A, Class B or Class C is $1,000 and the minimum
subsequent investment is $100 but such minimum amounts may be changed at any
time. The Fund may waive the minimum for purchases by trustees, directors,
officers or employees of the Fund or the Advisor and its affiliates. An order
for the purchase of Shares that is accompanied by a check drawn on a foreign
bank (other than a check drawn on a Canadian bank in U.S. Dollars) will not be
considered in proper form and will not be processed unless and until the Fund
determines that it has received payment of the proceeds of the check. The time
required for such a determination will vary and cannot be determined in advance.
Purchase of Shares
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
29
<PAGE>
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None(1) Initial sales charge
4.50% of the public offering price waived or reduced for
certain purchases
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A
charge declining from 4% of shares six years after
redemption proceeds; declines to issuance
zero after six years
Class C Contingent deferred sales charge of 0.75% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales charge
if redeemed within one year of purchase and a 0.50% contingent deferred
sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Kemper Fund
listed under "Special Features -- Class A shares -- Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
30
<PAGE>
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a), a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of the purchase of shares
purchased under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge. See "Redemption or Repurchase of Shares --
Contingent Deferred Sales Charge -- Large Order NAV Purchase Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Kemper Fund
listed under "Special Features -- Class A shares -- Combined Purchases,"
including purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above and including purchases of
Class R shares of certain Scudder Funds. The privilege of purchasing Class A
shares of the Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege also
applies.
Class A shares of the Fund or of any other Kemper Fund listed under "Special
Features -- Class A shares -- Combined Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally non-transferable
and continues for the lifetime of individual class members and for a ten year
period for non-individual class members. To make a purchase at net asset value
under this privilege, the investor must, at the time of purchase, submit a
written request that the purchase be processed at net asset value pursuant to
this privilege specifically identifying the purchaser as a member of the
"Tabankin Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares purchased under this privilege. For
more details concerning this privilege, class members should refer to the Notice
of (1) Proposed Settlement with Defendants; and (2) Hearing to Determine
Fairness of Proposed Settlement, dated August 31, 1995, issued in connection
with the aforementioned court proceeding. For sales of Fund shares at net asset
value pursuant to this privilege, KDI may in its discretion pay investment
dealers and other financial services firms a concession, payable quarterly, at
an annual rate of up to 0.25% of net assets attributable to such shares
maintained and serviced by the firm. A firm becomes eligible for the concession
based upon assets in accounts attributable to shares purchased under this
privilege in the month after the month of purchase and the concession continues
until terminated by KDI. The privilege of purchasing Class A shares of the Fund
at net asset value under this privilege is not available if another net asset
value purchase privilege also applies.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unit holders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
31
<PAGE>
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisors registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A shares, shares purchased
through the reinvestment of dividends and other distributions paid with respect
to Class B shares in a shareholder's Fund account will be converted to Class A
shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
32
<PAGE>
subaccount value in a Fund or other Kemper Funds listed under "Special Features
- Class A shares - Combined Purchases" is in excess of $1 million for Class B
shares or $5 million for Class C shares including purchases pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." KemFlex Plans that on May 1, 2000 have in
excess of $1 million invested in Class B shares of Kemper Funds, or have in
excess of $850,000 invested in Class B shares of Kemper Funds and are able to
qualify for the purchase of Class A shares at net asset value (e.g., pursuant to
a Letter of Intent), will have future investments made in Class A shares and
will have the option to covert their holdings in Class B shares to Class A
shares free of any contingent deferred sales charge on May 1, 2002. For more
information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
by KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
33
<PAGE>
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
Redemption or Repurchase of Shares
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 219153, Kansas City, Missouri 64141-9153. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above, less any applicable contingent preferred sales
charge. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed request accompanied by any outstanding share certificates in proper
form for transfer. When the Fund is asked to redeem shares for which it may not
have yet received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), it may delay transmittal of redemption proceeds until it
has determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by the Fund of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge -- Class B shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge -- Class C shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
34
<PAGE>
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
35
<PAGE>
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly, and (f)
redemption of shares purchased through a dealer-sponsored asset allocation
36
<PAGE>
program maintained on an omnibus record-keeping system provided the dealer of
record had waived the advance of the first year administrative services and
distribution fees applicable to such shares and has agreed to receive such fees
quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Fund listed under "Special Features -- Class A Shares
-- Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Funds. A shareholder of the Fund or other
Kemper Funds who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares -- Initial Sales Charge Alternative
-- Class A shares") or Class B shares or Class C shares and incurs a contingent
deferred sales charge may reinvest up to the full amount redeemed at net asset
value at the time of the reinvestment, in the same class of shares as the case
may be, of the Fund or of other Kemper Funds. The amount of any contingent
deferred sales charge also will be reinvested. These reinvested shares will
retain their original cost and purchase date for purposes of the contingent
deferred sales charge schedule. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Kemper Funds listed under "Special Features -- Class A Shares -- Combined
Purchases." Purchases through the reinvestment privilege are subject to the
minimum investment requirements applicable to the shares being purchased and may
only be made for Kemper Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
Special Features
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
37
<PAGE>
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Kemper Fund), Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper New
Europe Fund, Inc., Kemper Asian Growth Fund, Kemper Aggressive Growth Fund,
Kemper Global/International Series, Inc., Kemper Equity Trust and Kemper
Securities Trust, Scudder 21st Century Fund, The Japan Fund, Inc., Scudder High
Yield Tax Free Fund, Global Discovery Fund, Value Fund, and Classic Growth Fund
("Scudder Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investor's Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered a "Scudder Kemper Mutual Fund" for purposes hereof. For
purposes of the Combined Purchases feature described above as well as for the
Letter of Intent and Cumulative Discount features described below, employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent may include: (a) Money Market
Funds as "Kemper Mutual Funds", (b) all classes of shares of any Kemper Fund and
(c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Funds listed above made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
KDI. The Letter, which imposes no obligation to purchase or sell additional
Class A shares, provides for a price adjustment depending upon the actual amount
purchased within such period. The Letter provides that the first purchase
following execution of the Letter must be at least 5% of the amount of the
intended purchase, and that 5% of the amount of the intended purchase normally
will be held in escrow in the form of shares pending completion of the intended
purchase. If the total investments under the Letter are less than the intended
amount and thereby qualify only for a higher sales charge than actually paid,
the appropriate number of escrowed shares are redeemed and the proceeds used
toward satisfaction of the obligation to pay the increased sales charge. The
Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Funds held of record as of the initial purchase date under the
Letter as an "accumulation credit" toward the completion of the Letter, but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Funds and shares of the Money
Market Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
38
<PAGE>
Class B Shares. Class B shares of the Fund and Class B shares of any other
Kemper Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of calculating the contingent
deferred sales charge that may be imposed upon the redemption of the Class B
shares received on exchange, amounts exchanged retain their original cost and
purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Kemper Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, they retain the cost and purchase date of
the shares that were originally purchased and exchanged.
General. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). In addition, shares of a Kemper
Fund with a value of $1,000,000 or less (except Kemper Cash Reserves Fund)
acquired by exchange from another Kemper Fund, or from a Money Market Fund, may
not be exchanged thereafter until they have been owned for 15 days, if, in the
Advisor's judgment, the exchange activity may have an adverse effect on the
fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Kemper Fund and therefore may be
subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 219557, Kansas City, Missouri 64121-9597, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under "Redemption or Repurchase of Shares -- General."
Any share certificates must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Exchanges may only be made for Funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Investors Municipal
Cash Fund is available for sale only in certain states. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
39
<PAGE>
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated ClearingHouse debits against the designated account at a bank
or other financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
A Fund may immediately terminate a shareholder's Plan in the event that any item
is unpaid by the shareholder's financial institution. The Fund may terminate or
modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $100. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small Employers
("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
o Prototype money purchase pension and profit sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
40
<PAGE>
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the Exchange is closed other than customary
weekend and holiday closings or during any period in which trading on the
Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The net asset value per Share of the Fund is determined separately for each
class by dividing the value of the Fund's net assets attributable to that class
by the number of Shares of that class outstanding. The per share net asset value
of the Class B and Class C shares of the Fund will generally be lower than that
of the Class A shares of the Fund because of the higher expenses borne by the
Class B and Class C shares. The net asset value of Shares of the Fund is
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the SEC, taking such securities at the same value used to determine net asset
value, and selecting the securities in such manner as the Board of Trustees may
deem fair and equitable. If such a distribution occurred, shareholders receiving
securities and selling them could receive less than the redemption value of such
securities and in addition would incur certain transaction costs. Such a
redemption would not be so liquid as a redemption entirely in cash.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
Officers and Trustees
The officers and trustees of the Trust, their ages, their principal occupations
and their affiliations, if any, with the Advisor, and Scudder Investor Services,
Inc., are as follows (the number following each person's title is the number of
investment companies managed by the Advisor for which he or she holds similar
positions and the number following each person's name is his or her age):
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
---------------------- ---------- ------------ --------------
<S> <C> <C> <C>
Linda C. Coughlin (48)+* President and Managing Director of Scudder Director and Senior
Trustee Kemper Investments, Inc. Vice President
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational --
WGBH Foundation
125 Western Avenue
Allston, MA 02134
41
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
---------------------- ---------- ------------ --------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic --
50023 Brogden Counsellor, The Conference
Chapel Hill, NC Board, Inc. (Not-for-profit
business research organization)
Keith R. Fox (46) Trustee General Partner, Exeter Group of --
10 East 53rd Street Funds
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State
650 Fifth Avenue - Undersecretary of State for
New York, NY 10128 Economic, Business and
Agricultural Affairs (March 1993
to January 1997)
Kathryn L. Quirk (47)++ Vice President and Managing Director of Scudder Director, Senior Vice
Assistant Secretary Kemper Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
42
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
---------------------- ---------- ------------ --------------
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S.
Washington, D.C. General Accounting Office
(1996-1997); Partner, Fulbright
& Jaworski (law firm) (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place Capital, LLC (venture capital
23rd Floor firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP --
601 E. Street, NW Services, Inc.
7th Floor
Washington, D.C. 20004
Philip G. Condon (49) + Vice President Managing Director of Scudder Senior Vice President
Kemper Investments, Inc. and Director
Ashton P. Goodfield (35) + Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Thomas V. Bruns (43)*** Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ann M. McCreary (43) # Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John R. Hebble (42) + Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Caroline Pearson (37) + Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
William F. Glavin (41) + Vice President Managing Director of Scudder Vice President
Kemper Investments, Inc.
James E. Masur (40) + Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Howard Schneider (43) + Vice President Managing Director of Scudder --
Kemper Investments, Inc.
43
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
---------------------- ---------- ------------ --------------
Brenda Lyons (37) + Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
John Millette (37) + Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and their counsel
to be Trustees who are "interested persons" of the Advisor or of the Fund,
within the meaning of the 1940 Act.
** Unless otherwise stated, all Trustees and Officers have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
@ Address: 222 South Riverside Plaza, Chicago, Illinois
The Trustees and officers of the Trust also serve in similar capacities with
other Scudder Funds.
To the knowledge of the Trust, as ofAugust 31, 2000, all Trustees and officers
of the Trust as a group owned beneficially (as that term is defined under
Section 13(d) of the Securities Exchange Act of 1934) less than 1% of the Class
A, Class B or Class C shares of the Fund outstanding on such date.
To the knowledge of the Trust, as of August 31, 2000, no person owned
beneficially more than 5% of the Class A, Class B or Class C shares of the Fund
outstanding on such date, with the exception of the following:
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general oversight of
the Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to time have established and served on task forces and subcommittees
focusing on particular matters such as investment, accounting and shareholder
service issues.
44
<PAGE>
Compensation of Officers and Trustees of the Fund
Each Independent Trustee receives compensation for his or her services, which
includes an annual retainer and an attendance fee for each meeting attended. The
Independent Trustee who serves as lead trustee receives additional compensation
for his or her service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at trustee's educational
seminars or conferences, service on industry or association committees,
participation as speakers at trustees' conferences or service on special trustee
task forces or subcommittees. Independent Trustees do not receive any employee
benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees of the Fund also serve as Independent Trustees of
certain other Scudder Funds, which enables them to address investment and
operational issues that are common to many of the Scudder Funds in a
cost-efficient and effective manner. During 1999, the Independent Trustees
participated in 25 meetings of the Fund's board or board committees, which were
held on 21 different days during the year.
The Independent Trustees also serve in the same capacity for other funds managed
by the Advisor. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1999 from the Trust and from all of Scudder funds as a group.
Paid by Paid by
Name the Trust* the Funds
---- ---------- ---------
Henry P. Becton $12,910 $140,000 (30 funds)
Trustee
Dawn-Marie Driscoll $13,714 $150,000 (30 funds)
Trustee
Edgar R. Fiedler** $0 $73,230 (29 funds)
Trustee
Keith R. Fox**Trustee $0 $160,325 (23 funds)
Joan E. Spero**Trustee $0 $175,275 (23 funds)
Jean Gleason Stromberg** $0 $40,935 (16 funds)
Trustee
Jean C. Tempel $12,982 $140,000 (30 funds)
45
<PAGE>
Paid by Paid by
Name the Trust* the Funds
---- ---------- ---------
Trustee
* Scudder Municipal Trust consists of two funds: Scudder Managed Municipal
Bonds and Scudder High Yield Tax Free Fund.
** Newly-elected Trustee. On July 11, 2000, shareholders of each fund elected
a new Board of Trustees. See the "Trustees and Officers" section for the
newly-constituted Board of Trustees.
Members of the Board of Trustees who are employees of the Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
Shareholder Rights
Scudder Municipal Trust is a Massachusetts business trust established under a
Declaration of Trust dated September 24, 1976, as amended. The Trustees of
Scudder Municipal Trust have established and designated two series of the Trust:
Scudder Managed Municipal Bonds and Scudder High Yield Tax Free Fund. The
Trust's authorized capital consists of an unlimited number of shares of
beneficial interest, par value $0.01 per share. The Fund's shares are currently
divided into five classes Class A, Class B, Class C, Class AARP and Class S
shares.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having a par value of $.01, which may be
divided by the Board of Trustees into classes of shares. The Board of Trustees
of the Fund may authorize the issuance of additional classes and additional
Portfolios if deemed desirable, each with its own investment objective, policies
and restrictions. Since the Trust may offer multiple Portfolios, it is known as
a "series company." Currently, the Trust offers five classes of shares of the
Fund. These are Class A, Class B, Class C and Class S shares. Shares of a
Portfolio have equal noncumulative voting rights except that Class B and Class C
shares have separate and exclusive voting rights with respect to each such
class' Rule 12b-1 Plan. Shares of each class also have equal rights with respect
to dividends, assets and liquidation of the Fund subject to any preferences
(such as resulting from different Rule 12b-1 distribution fees), rights or
privileges of any classes of shares of the Fund. Shares are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. If shares of more than one Portfolio are
outstanding, shareholders will vote by Portfolio and not in the aggregate or by
class except when voting in the aggregate is required under the 1940 Act, such
as for the election of trustees, or when voting by class is appropriate.
The Fund generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which approval by shareholders is
required by the 1940 Act; (c) any termination of the Fund or a class to the
extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration of Trust (other than amendments changing the name of the Fund,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Fund, or any registration of the Fund with the SEC or any state,
or as the trustees may consider necessary or desirable. The shareholders also
would vote upon changes in fundamental policies or restrictions.
Any matter shall be deemed to have been effectively acted upon with respect to a
Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectuses and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Fund and all additional portfolios
(e.g., election of directors), means the vote of the lesser of (i) 67% of the
Trust's Shares represented at a meeting if the holders of more than 50% of the
outstanding Shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding Shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the Shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding Shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding Shares of the portfolio.
46
<PAGE>
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the Shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Any of the Trustees may be removed (provided the aggregate number of Trustees
after such removal shall not be less than one) with cause, by the action of
two-thirds of the remaining Trustees. Any Trustee may be removed at any meeting
of shareholders by vote of two-thirds of the Outstanding Shares. The Trustees
shall promptly call a meeting of the shareholders for the purpose of voting upon
the question of removal of any such Trustee or Trustees when requested in
writing to do so by the holders of not less than ten percent of the Outstanding
Shares, and in that connection, the Trustees will assist shareholder
communications to the extent provided for in Section 16(c) under the 1940 Act.
The Fund's Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by the Advisor remote and
not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
The assets of the Trust received for the issue or sale of the Shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the Shares of any series
are entitled to receive as a class the underlying assets of such Shares
available for distribution to shareholders.
Further, the Fund's Board of Trustees may determine, without prior shareholder
approval, in the future that the objectives of the Fund would be achieved more
effectively by investing in a master fund in a master/feeder fund structure.
The Trust's Board of Trustees supervises the Fund's activities. The Trust has
adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940 Act to permit
the Trust to establish a multiple class distribution system.
Under the Plan, shares of each class represent an equal pro rata interest in the
Fund and, generally, shall have identical voting, dividend, liquidation, and
other rights, preferences, powers, restrictions, limitations, qualifications and
terms and conditions, except that: (1) each class shall have a different
designation; (2) each class of shares shall bear its own "class expenses;" (3)
each class shall have exclusive voting rights on any matter submitted to
shareholders that relates to its administrative services, shareholder services
or distribution arrangements; (4) each class shall have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class; (5) each class may have separate
and distinct exchange privileges; (6) each class may have different conversion
features, and (7) each class may have separate account size requirements.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Additional Information
Shareholder Indemnification
47
<PAGE>
The Trust is an organization of the type commonly known as a Massachusetts
business trust. Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the Trust. The Declarations of Trust of the Trust contain an express
disclaimer of shareholder liability in connection with the Fund's property or
the acts, obligations or affairs of the Fund. The Declarations of Trust also
provide for indemnification out of the Fund's property of any shareholder held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Other Information
The CUSIP numbers of the classes are:
Class A 811170307
Class B 811170406
Class C 811170505
The Fund has a fiscal year ending May 31. On August 10, 1998, the Board of the
Fund changed the fiscal year end from December 31 to May 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Willkie Farr & Gallagher is legal counsel to the Fund.
The name "Scudder Municipal Trust" is the designation of the Trustees for the
time being under an Amended and Restated Declaration of Trust dated December 11,
1987, as amended from time to time, and all persons dealing with the Fund must
look solely to the property of the Fund for the enforcement of any claims
against that Fund as neither the Trustees, officers, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Fund. Upon the initial purchase of shares, the shareholder agrees to be bound by
the Fund's Declaration of Trust, as amended from time to time. The Declaration
of Trust of the Fund is on file at the Massachusetts Secretary of State's Office
in Boston, Massachusetts.
The Fund's Shares prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments are available for inspection by the public at the
SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated May 31, 2000, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A, Baa, Ba
and B. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa are judged to be of high quality by all standards. Together with the
Aaa group, they comprise what are generally known as high grade bonds. Together
with securities rated A and Baa, they comprise investment grade securities.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
48
<PAGE>
bonds have speculative elements as well as investment grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade.
Moody's judges municipal bonds rated Ba to have speculative elements, with very
moderate protection of interest and principal payments and thereby not well
safeguarded under any future conditions. Municipal bonds rated B by Moody's
generally lack characteristics of desirable investments. Long-term assurance of
the contract terms of B-rated municipal bonds, such as interest and principal
payments, may be small. Securities rated Ba or below are commonly referred to as
"junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA (High
grade), A (Good grade), BBB (Investment grade), BB (Below investment grade) and
B. Bonds rated AAA have the highest rating assigned by S&P to a municipal
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in a small degree. Bonds rated A
have a strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions. Bonds rated BBB have an adequate capacity to pay interest and to
repay principal. Adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds of this category than for bonds of higher rated categories. Securities
rated BB or below by S&P are considered below investment grade. Debt rated BB by
S&P faces major ongoing uncertainties or exposure to adverse conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. Municipal bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Securities rated BB or below are commonly referred to as "junk" bonds and as
such they carry a high margin of risk.
S&P's top ratings for municipal notes are SP1 and SP2. The designation SP1
indicates a very strong capacity to pay principal and interest. A "+" is added
for those issues determined to possess overwhelming safety characteristics. An
SP2 designation indicates a satisfactory capacity to pay principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A, BBB, BB and
B. Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F1+. Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings. Securities
rated BB or below by Fitch are considered below investment grade. Fitch
considers bonds rated BB to be speculative because the issuer's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, although financial alternatives can be identified to assist the issuer
in meeting its obligations. While bonds rated B are currently meeting debt
service requirements, they are considered highly speculative in light of the
issuer's limited margin of safety. Securities rated BB or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Commercial Paper Ratings
Commercial paper rated A1 or better by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned.
49
<PAGE>
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations.
The rating F1 is the highest rating assigned by Fitch. Among the factors
considered by Fitch in assigning this rating are: (1) the issuer's liquidity;
(2) its standing in the industry; (3) the size of its debt; (4) its ability to
service its debt; (5) its profitability; (6) its return on equity; (7) its
alternative sources of financing; and (8) its ability to access the capital
markets. Analysis of the relative strength or weakness of these factors and
others determines whether an issuer's commercial paper is rated F-1.
Relative strength or weakness of the above factors determine how the issuer's
commercial paper is rated within the above categories.
Recently comparatively short-term obligations have been introduced in the
municipal market. S&P, Moody's and Fitch rate such obligations. While the
factors considered in municipal credit evaluations differ somewhat from those
relevant to corporate credits, the rating designations and definitions used with
respect to such obligations by S&P and Moody's are the same, respectively, as
those used in their corporate commercial paper ratings.
Glossary
Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest
is generally paid semiannually in amounts equal to one half the
annual interest rate.
Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
Discount and Premium
(a) Market Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market discount
(premium) is the difference between market price and face value.
(b) Original Issue Discount
An original issue discount is the discount from face value at which
the bond is first offered to the public.
Face Value
The value of a bond that appears on the face of the bond, unless the
value is otherwise specified by the issuing company. Face value is
ordinarily the amount the issuing company promises to pay at
maturity. Face value is not an indication of market value.
Liquidation
The process of converting securities or other property into cash.
Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
50
<PAGE>
Municipal Security
Securities issued by or on behalf of states, territories and
possessions of the United States, their political subdivisions,
agencies and instrumentalities and the District of Columbia and other
issuers, the interest from which is, at the time of issuance in the
opinion of bond counsel for the issuers, exempt from federal income
tax, except for the applicability of the alternative minimum tax.
Net Asset Value Per Share
The value of each share of the Fund for purposes of sales and
redemptions.
Net Investment Income
The net investment income of a Fund is comprised of its interest
income, including accretion of original issue discounts, less
amortization of premiums and expenses paid or accrued computed under
Generally Accepted Accounting Principles (GAAP).
Par Value
Par value of a bond is a dollar amount representing the denomination
and assigned value of the bond. It signifies the dollar value on
which interest on the bonds is computed and is usually the same as
face value and maturity value for an individual bond. For example,
most bonds are issued in $1,000 denominations and they have a face
value, maturity value and par value of $1,000. Their market price can
of course vary significantly from $1,000 during their life between
issuance and maturity.
Series
Scudder Municipal Trust is composed of two series: Scudder Managed
Municipal Bonds and Scudder High Yield Tax Free Fund. Each Series is
distinct from the other, although both Scudder Managed Municipal
Bonds and Scudder High Yield Tax Free Fund are combined in one
investment company -- Scudder Municipal Trust.
51
<PAGE>
SCUDDER MUNICIPAL TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <C> <C>
(a) (1) Amended and Restated Declaration of Trust, dated December 8, 1987, is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(2) Amendment to Amended and Restated Declaration of Trust, dated December 11,
1990, is incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(3) Instrument, dated October 29, 1986, Establishing and Designating an
Additional Series of Shares is incorporated by reference to Post-Effective
Amendment No. 33 to the Registration Statement.
(4) Establishment and Designation of Series dated November 6, 1987, is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(5) Establishment and Designation of Classes of Shares of Beneficial Interest,
$0.01 par value, with respect to Scudder High Yield Tax Free Fund (Class A
Shares, Class B Shares, Class C Shares and Class S Shares), dated February
8, 2000 is incorporated by reference to Post-Effective Amendment No. 41 to
the Registration Statement.
(6) Establishment and Designation of Classes of Shares of Beneficial Interest,
$0.01 par value, Class S and Class AARP with respect to Scudder Managed
Municipal Bonds, dated April 11, 2000 is incorporated by reference to
Post-Effective Amendment No. 42 to the Registration Statement.
(7) Establishment and Designation of Classes of Shares of Beneficial Interest,
$0.01 par value, Class A Shares, Class B Shares, Class C Shares, Class S
Shares and Class AARP Shares with respect to Scudder High Yield Tax Free
Fund, dated April 11, 2000 is incorporated by reference to Post-Effective
Amendment No. 43 to the Registration Statement.
(b) (1) By-laws of the Registrant, dated September 24, 1976 as amended through
December 31, 1979, is incorporated by reference to Post-Effective Amendment
No. 33 to the Registration Statement.
(2) Amendment to the By-laws of the Registrant as amended through December 8,
1987, is incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(3) Amendment to the By-laws of Registrant, dated August 13, 1991, is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(4) Amendment to the By-laws of Registrant, dated December 10, 1991, is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
2
<PAGE>
(5) Amendment to the By-laws of Registrant, dated February 7, 2000, is
incorporated by reference to Post-Effective Amendment No. 44 to the
Registration Statement.
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant (on behalf of Scudder
Managed Municipal Bonds) and Scudder Kemper Investments, Inc., dated
September 7, 1998, is incorporated by reference to Post-Effective Amendment
No. 36 to the Registration Statement.
(2) Investment Management Agreement between the Registrant (on behalf of Scudder
High Yield Tax Free Fund) and Scudder Kemper Investments, Inc., dated
September 7, 1998, is incorporated by reference to Post-Effective Amendment
No. 36 to the Registration Statement.
(3) Investment Management Agreement between the Registrant (on behalf of Scudder
Managed Municipal Bonds) and Scudder Kemper Investments, Inc., dated July
31, 2000, is incorporated by reference to Post-Effective Amendment No. 44 to
the Registration Statement.
(e) (1) Underwriting Agreement between the Registrant and Scudder Investor Services,
Inc., dated September 7, 1998, is incorporated by reference to
Post-Effective Amendment No. 36 to the Registration Statement.
(2) Underwriting Agreement between the Registrant and Kemper Distributors, Inc.,
dated May 1, 2000, is incorporated by reference to Post-Effective Amendment
No. 41 to the Registration Statement.
(3) Underwriting Agreement between the Registrant and Scudder Investor Services,
Inc. dated May 8, 2000 is incorporated by reference to Post-Effective
Amendment No. 42 to the Registration Statement.
(f) Inapplicable.
(g) (1) Custodian Contract between the Registrant and State Street Bank and Trust
Company, dated March 17, 1980, is incorporated by reference to
Post-Effective Amendment No. 33 to the Registration Statement.
(2) Fee schedule for Exhibit (g)(1) is incorporated by reference to
Post-Effective Amendment No. 33 to the Registration Statement.
(3) 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. 33 to the Registration Statement.
(4) Amendment to the Custodian Contract between the Registrant and State Street
Bank and Trust Company, dated August 9, 1988, is incorporated by reference
to Post-Effective Amendment No. 33 to the Registration Statement.
(5) Amendment to the Custodian Contract between the Registrant and State Street
Bank and Trust Company, dated December 11, 1990, is incorporated by
reference to Post-Effective Amendment No. 33 to the Registration Statement.
3
<PAGE>
(6) Subcustodian Agreement and Fee Schedule between State Street Bank and Trust
Company and The Bank of New York, London office, dated December 31, 1978, is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(7) Subcustodian Agreement between Irving Trust Company and State Street Bank,
dated November 30, 1987, is incorporated by reference to Post-Effective
Amendment No. 33 to the Registration Statement.
(9) Subcustodian Agreement between State Street Bank and Trust Company and
Morgan Guaranty Trust Company of New York, dated November 25, 1985, is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement.
(10) Subcustodian Agreement between Chemical Bank and State Street Bank and Trust
Company, dated May 31, 1988, is incorporated by reference to Post-Effective
Amendment No. 33 to the Registration Statement.
(11) Subcustodian Agreement between and Security Pacific National Bank and Trust
Company (New York) and State Street Bank and Trust Company, dated February
18, 1988, is incorporated by reference to Post-Effective Amendment No. 33 to
the Registration Statement.
(12) Subcustodian Agreement between Bankers Trust Company and State Street Bank
and Trust Company, dated August 15, 1989, is incorporated by reference to
Post-Effective Amendment No. 33 to the Registration Statement.
(h) (1) Transfer Agency, Service Agreement and Fee Schedule between the Registrant
and Scudder Service Agreement, dated October 2, 1989, is incorporated by
reference to Post-Effective Amendment No. 33 to the Registration Statement.
(2) Revised Fee Schedule dated October 1, 1996 for Exhibit (h)(1) is
incorporated by reference to Post-Effective Amendment No. 32 to the
Registration Statement.
(3) Fund Accounting Services Agreement between the Registrant (on behalf of
Scudder High Yield Tax Free Fund) and Scudder Fund Accounting Corporation,
dated January 23, 1995, is incorporated by reference to Post-Effective
Amendment No. 29 to the Registration Statement.
(4) Fund Accounting Services Agreement between the Registrant (on behalf of
Scudder Managed Municipal Bonds) and Scudder Fund Accounting Corporation,
dated February 9, 1995, is incorporated by reference to Post-Effective
Amendment No. 29 to the Registration Statement.
(5) Administrative Services Agreement between Scudder High Yield Tax Free Fund
and Kemper Distributors, Inc., dated May 1, 2000, is incorporated by
reference to Post-Effective Amendment No. 41 to the Registration Statement.
(6) Agency Agreement between the Registrant (on behalf of Scudder High Yield Tax
Free Fund) and Kemper Service Company, dated May 1, 2000, is incorporated by
reference to Post-Effective Amendment No. 41 to the Registration Statement.
4
<PAGE>
(7) Fund Accounting Agreement between Scudder High Yield Tax Free Fund and
Scudder Fund Accounting Corporation, dated May 1, 2000, is incorporated by
reference to Post-Effective Amendment No. 41 to the Registration Statement.
(8) Administrative Agreement between the Registrant on behalf of Scudder
Municipal Trust and Scudder Kemper Investments, Inc. dated July 31, 2000 is
filed herein.
(i) Opinion and Consent of Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Rule 12b-1 Plan for Class B and Class C Shares of Scudder High Yield Tax
Free Fund, dated May 1, 2000, is incorporated by reference to Post-Effective
Amendment No. 41 to the Registration Statement.
(n)(1) Mutual Funds Multi-Distribution System Plan Pursuant to Rule 18f-3 is
incorporated by reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(n)(2) Plan with respect to Scudder Managed Municipal Bonds pursuant to Rule 18f-3
is incorporated by reference to Post-Effective Amendment No. 42 to the
Registration Statement.
(n)(3) Amended and Restated Plan with respect to Scudder Municipal Bonds pursuant
to Rule 18f-3 is incorporated by reference to Post-Effective Amendment No.
42 to the Registration Statement.
(n)(4) Plan with respect to Scudder High Yield Tax Free Fund pursuant to Rule 18f-3
is incorporated by reference to Post-Effective Amendment No. 42 to the
Registration Statement.
(p) (1) Code of Ethics of Scudder Kemper Investments, Inc., Scudder Investor
Services, Inc. and Kemper Distributors, Inc. is incorporated by reference to
Post-Effective Amendment No. 41 to the Registration Statement.
(2) Code of Ethics of Scudder Municipal Trust is incorporated by reference to
Post-Effective Amendment No. 42 to the Registration Statement.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
-------- --------------------------------------------------------
None
Item 25. 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 Kemper
5
<PAGE>
Investments, 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 the 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, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to
a Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
6
<PAGE>
(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) or (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 insure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a
defense to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section 4.3 may
be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under this Section
4.3, provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is not (i) an
"Interested Person" of the Trust (including anyone who has been exempted from
being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser
-------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
7
<PAGE>
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments,
Inc.**
Director and Chairman, Scudder Investments (Luxembourg) S.A.#
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. +++
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. +
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director, Scudder Kemper Investments, Inc.**
Vice President, Scudder, Stevens & Clark Corporation **
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
8
<PAGE>
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Vice President, Chief Legal Officer and Secretary, Kemper Distributors, Inc.
Director and Secretary, Kemper Service Company
Director, Senior Vice President, Chief Legal Officer & Assistant Clerk, Scudder
Investor Services, Inc.
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director and Secretary, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc. ###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. @@
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @@
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Threadneedle International Ltd.
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings Ltd.
</TABLE>
* Two International Place, Boston, MA
@@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
+++ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
9
<PAGE>
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo One South Place, 5th Floor, London EC2M 2ZS England
ooo One Exchange Square, 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
x Level 3, Five Blue Street, North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- ----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
<S> <C> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President Trustee and President
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
10
<PAGE>
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions And Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
(d)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper Funds.
(e)
11
<PAGE>
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The principal
business address is 222 South Riverside Plaza, Chicago, Illinois 60606.
f<TABLE>
<CAPTION>
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
----- ------------------------- -----------------------
<S> <C> <C> <C>
Thomas V. Bruns President None
Linda C. Coughlin Director and Vice Chairman None
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Treasurer None
Linda J. Wondrack Vice President and Chief Compliance Vice President
Officer
Paula Gaccione Vice President None
Michael E. Harrington Managing Director None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director and Chairman President
Terrence S. McBride Vice President None
Robert Froelich Managing Director None
C. Perry Moore Senior Vice President and Managing None
Director
Lorie O'Malley Managing Director None
William F. Glavin Managing Director None
Gary N. Kocher Managing Director None
Susan K. Crenshaw Vice President None
Johnston A. Norris Managing Director and Senior Vice None
President
John H. Robison, Jr. Managing Director and Senior Vice None
President
Robert J. Guerin Vice President None
Kimberly S. Nassar Vice President None
</TABLE>
12
<PAGE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
Kemper Distributors, Inc. None None None None
</TABLE>
Item 28. Location of Accounts and Records.
-------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
-------- --------------------
Inapplicable.
Item 30. Undertakings.
-------- -------------
Inapplicable.
13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 26th day of September, 2000.
SCUDDER MUNICIPAL TRUST
By /s/ John Millette
-------------------------
John Millette
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Henry P. Becton, Jr.
--------------------------------------
Henry P. Becton, Jr.* Trustee September 26, 2000
/s/ Linda C. Coughlin
--------------------------------------
Linda C. Coughlin* Trustee and President (Chief Executive September 26, 2000
Officer)
/s/Dawn-Marie Driscoll
--------------------------------------
Dawn-Marie Driscoll* Trustee September 26, 2000
/s/ Edgar R. Fiedler
--------------------------------------
Edgar R. Fiedler * Trustee September 26, 2000
/s/ Keith R. Fox
--------------------------------------
Keith R. Fox* Trustee September 26, 2000
/s/ Joan E. Spero
--------------------------------------
Joan E. Spero* Trustee September 26, 2000
/s/ Jean Gleason Stromberg
--------------------------------------
Jean Gleason Stromberg* Trustee September 26, 2000
/s/ Jean C. Tempel
--------------------------------------
Jean C. Tempel* Trustee September 26, 2000
/s/ Steven Zaleznick
--------------------------------------
Steven Zaleznick* Trustee September 26, 2000
/s/ John R. Hebble
--------------------------------------
John R. Hebble Treasurer (Chief Financial Officer) September 26, 2000
</TABLE>
<PAGE>
*By: /s/ John Millette
-----------------------------------
John Millette**
Secretary
** Attorney-in-fact pursuant to the
powers of attorney contained in
Post-Effective Amendment No. 43 to the
Registration Statement, filed on July
14, 2000.
<PAGE>
File No. 2-57139
File No. 811-2671
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 45
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 36
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER MUNICIPAL TRUST
<PAGE>
SCUDDER MUNICIPAL TRUST
EXHIBIT INDEX
Exhibit (h)(8)
Exhibit (i)
Exhibit (j)
