Filed electronically with the Securities and Exchange
Commission on February 26, 1999
File No. 2-81105
File No. 811-3632
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. 31 / X /
--
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 31 / X /
--
Scudder Tax Free 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) 295-2567
-------------
Thomas F. McDonough
-------------------
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 March 1, 1999 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
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Prospectus
March 1, 1999
Four funds seeking tax-free income through different investment objectives.
No-load/No Sales Charges
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 About the Funds
- --------------------------------------------------------------------------------
1 Scudder Limited Term Tax Free Fund
5 Scudder Medium Term Tax Free Fund
9 Scudder Managed Municipal Bonds
13 Scudder High Yield Tax Free Fund
17 A message from the President
18 Investment adviser
20 Distributions
20 Taxes
22 Financial highlights
26 About Your Investment
- --------------------------------------------------------------------------------
26 Transaction information
27 Buying and selling shares
28 Purchases
29 Exchanges and redemptions
30 Investment products and services
32 Trustees and Officers
<PAGE>
About the Funds
Scudder Limited Term Tax Free Fund
Investment objective
Scudder Limited Term Tax Free Fund seeks to produce as high a level of income
exempt from regular federal income tax as is consistent with a high degree of
principal stability. Unless otherwise indicated, the fund's investment
objectives and policies may be changed without a vote of shareholders.
Main investment strategies
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the fund's assets be invested in municipal
securities. Under normal market conditions, however, each fund expects to invest
100% of its portfolio securities in municipal securities. Municipal securities
include notes and bonds issued by states, cities and towns to raise revenue for
various public interests. The fund invests in municipal securities that are debt
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their subdivisions, agencies and
instrumentalities, the interest on which is, in the opinion of bond counsel,
exempt from regular federal income tax. The fund pursues its goal by investing
at least 65% of its net assets in high-quality and medium-grade tax-exempt
municipal securities with independent credit ratings of Aaa, Aa, A/AAA, AA, A
(and their unrated equivalents). The fund may also invest in debt securities
rated Baa/BBB (and their unrated equivalents).
The fund maintains a diversified portfolio of shorter-term, high-grade municipal
debt securities with a dollar-weighted average effective maturity of between one
and five years. In managing its portfolio the fund analyzes securities for
attractive and competitive value in terms of quality, yield and the relationship
of current price to maturity level. In managing the fund, the portfolio
management team considers, among other things, the impact on the prices of
municipal securities in response to changes in economic conditions, fiscal and
monetary policies, interest rate levels and supply and demand. The portfolio
management team performs credit analysis and attempts to take advantage of
opportunities to improve the fund's total return.
The portfolio management team will sell a security from the fund's portfolio
under certain circumstances, including: declining credit condition of a holding;
to adjust the duration of the fund's portfolio or to sell a security with a
maturity in an unattractive part of the yield
1
<PAGE>
curve; to raise cash to meet redemptions; to purchase a bond with better value,
improved structure or liquidity; and, when market conditions generate a higher
than normal price for a security.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, make the
following investments:
The fund may invest up to 20% of its assets in cash or invest in short-term
taxable investments, including U.S. Government obligations and money market
instruments. Normally, however, the fund expects to be fully invested in
tax-exempt securities.
The fund may utilize other investments and investment techniques that may impact
performance, including, but not limited to, options, futures and other
derivatives (financial investments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund manages its exposure to interest rate risk by adjusting its duration.
Duration, expressed in years, is based on the estimated payback period of income
and principal of a bond (or portfolio of bonds) and is the most widely used
gauge of sensitivity to interest rate change. The longer a fund's duration, the
more sharply its price is likely to rise or fall when interest rates change.
The fund may not purchase securities with effective maturities greater than 10
years at the time of purchase, whichever is later. The fund may, but is not
required to, use certain derivatives in an attempt to manage risk. The use of
certain derivatives could magnify losses.
For temporary defensive purposes, the fund may, but is not required to,
temporarily invest more than 20% of its assets in taxable securities. In such a
case, the fund would not be pursuing, and may not achieve, its investment
objective.
Main risks
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, as with most tax-free bond funds, a major
factor affecting the fund's performance is interest rates. When interest rates
rise, the price of bonds (and tax-free bond funds) typically fall in proportion
to their duration. Because this fund intends to have a shorter duration, the
interest rate risk is less in this fund than in a fund that intends to be
principally invested in municipal securities with long-term maturities. The fund
may have lower returns
2
<PAGE>
than other funds that invest in lower-quality municipal securities. Municipal
securities in the fund's portfolio could be downgraded or go into default.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time. It is possible to lose money
invested in the fund.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1995.................... 9.38%
1996.................... 3.99%
1997.................... 5.87%
1998.................... 4.92%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 3.24% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was 0.21% (the first quarter of 1996).
Average annual total returns
For periods ended Scudder Limited Term Tax Lehman Brothers Municipal
December 31, 1998 Free Fund Bond Index (3-year)
- --------------------------------------------------------------------------------
One Year 4.92% 5.21%
Since Inception (2/15/94) 5.00% 5.10%*
- --------------------------------------------------------------------------------
* Index comparison begins February 28, 1994.
3
<PAGE>
The 3-year Lehman Brothers Municipal Bond Index is an unmanaged,
market-value-weighted measure of the short-term municipal bond market and
includes bonds with maturities of two to three years. Index returns assume
reinvested dividends and, unlike fund returns, do not reflect fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of offering
price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.60%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.22%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 0.82%
- --------------------------------------------------------------------------------
Expense reimbursement 0.07%
- --------------------------------------------------------------------------------
Net expenses 0.75%**
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
** Total fund operating expenses are contractually maintained at 0.75%
through September 30, 1999.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
4
<PAGE>
- -------------------------------------------------------------------------------
One Year $ 84
- --------------------------------------------------------------------------------
Three Years $ 262
- --------------------------------------------------------------------------------
Five Years $ 455
- --------------------------------------------------------------------------------
Ten Years $ 1,014
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
Scudder Medium Term Tax Free Fund
Investment objective
Scudder Medium Term Tax Free Fund seeks to produce a high level of income free
from regular federal income taxes and to limit principal fluctuation. Unless
otherwise indicated, the fund's investment objectives and policies may be
changed without a vote of shareholders.
Main investment strategies
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 be invested in
municipal securities. Under normal market conditions, however, each fund expects
to invest 100% of its portfolio securities in municipal securities. Municipal
securities include notes and bonds issued by states, cities and towns to raise
revenue for various public shares. The fund invests in municipal securities that
are debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their
subdivisions, agencies and instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax. The fund
pursues its goal by investing at least 65% of its net assets in high-quality,
intermediate-term tax-exempt municipal securities with independent credit
ratings of Aaa, Aa, A/AAA, AA, A (and their unrated equivalents). The fund may
also invest in debt securities rated Baa/BBB (and their unrated equivalents).
The fund maintains a diversified portfolio of high-grade, intermediate-term
municipal bonds with a dollar-weighted average effective maturity of between
five and 10 years. Within this limitation, the fund may not purchase securities
with effective maturities greater than 15 years. In managing its portfolio the
fund analyzes securities for attractive and competitive value in terms of
quality, yield and the relationship of current price to maturity level. However,
considering the impact on municipal securities prices in response to changes in
economic conditions, fiscal and monetary policies, interest rate levels and
supply and demand, the fund performs credit analysis and manages the fund's
portfolio, attempting to take advantage of opportunities to improve the fund's
total return.
5
<PAGE>
The portfolio management team will sell a security from the fund's portfolio
under certain circumstances, including: declining credit condition of a holding;
to adjust the duration of the fund's portfolio or to sell a security with a
maturity in an unattractive part of the yield curve; to raise cash to meet
redemptions; to purchase a bond with better value, improved structure or
liquidity; and, when market conditions generate a higher than normal price for a
security.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, make the
following investments:
The fund may invest more than 25% of its assets in industrial development or
other private activity bonds. The fund may, but is not required to, invest up to
20% of its assets in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments. Normally,
however, the fund expects to be fully invested in tax-exempt securities.
The fund may utilize other investments and investment techniques that may impact
performance, including, but not limited to, options, futures and other
derivatives (financial investments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund manages its exposure to interest rate risk by adjusting its duration.
Duration, expressed in years, is based on the estimated payback period of income
and principal of a bond (or portfolio of bonds) and is the most widely used
gauge of sensitivity to interest rate change. The longer a fund's duration, the
more sharply its price is likely to rise or fall when interest rates change. The
fund expects to have more price stability than a fund with a longer duration,
i.e. investments only in long-term municipal bonds.
The fund minimizes its exposure to credit risk by investing at least 65% of its
net assets in the three highest rated bond categories.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may temporarily invest more than 20%
of its assets in taxable securities. In such a case, the fund would not be
pursuing, and may not achieve, its investment objective.
6
<PAGE>
Main risks
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, as with most tax-free bond funds, a major
factor affecting the fund's performance is interest rates. When interest rates
rise, the price of bonds (and tax-free bond funds) typically fall in proportion
to their duration. Because this fund intends to have a shorter duration, the
interest rate risk is less in this fund than in a fund that intends to be
principally invested in municipal securities with long-term maturities. The fund
may have lower returns than other funds that invest in lower-quality municipal
securities. Municipal securities in the fund's portfolio could be downgraded or
go into default.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time. It is possible to lose money
invested in the fund.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1989.................... 6.00%
1990.................... 6.29%
1991.................... 12.13%
1992.................... 8.93%
1993.................... 10.94%
1994.................... -3.50%
1995.................... 14.32%
1996.................... 4.02%
1997.................... 7.69%
1998.................... 5.58%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 5.09% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was -4.02% (the first quarter of 1994).
7
<PAGE>
Average annual total returns
For periods ended Scudder Medium Term Tax Lehman Brothers Municipal
December 31, 1998 Free Fund Bond Index
- --------------------------------------------------------------------------------
One Year 5.58% 6.48%
Five Years 5.46% 6.22%
Ten Years 7.13% 8.22%
- --------------------------------------------------------------------------------
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of the long-term, investment grade tax-exempt bond market consisting of
municipal bonds with a maturity of at least two years. Generally, the index's
average effective maturity is longer than the fund's. Index returns assume
dividends are reinvested and, unlike fund returns, do not reflect any fees or
expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of offering
price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.57%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.15%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 0.72%
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
8
<PAGE>
- --------------------------------------------------------------------------------
One Year $ 74
- --------------------------------------------------------------------------------
Three Years $ 230
- --------------------------------------------------------------------------------
Five Years $ 401
- --------------------------------------------------------------------------------
Ten Years $ 894
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
Scudder Managed Municipal Bonds
Investment objective
Scudder Managed Municipal Bonds seeks to provide income exempt from regular
federal income tax primarily through investment in high-grade, long-term
municipal securities. Unless otherwise indicated, the fund's investment
objectives and policies may be changed without a vote of shareholders.
Main investment strategies
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 be invested in
municipal securities. Under normal market conditions, however, each fund expects
to invest 100% of its portfolio securities in municipal securities. Municipal
securities include notes and bonds issued by states, cities and towns to raise
revenue for various public shares. The fund invests in municipal securities that
are debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their
subdivisions, agencies and instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax. The fund
pursues its goal by investing at least 65% of its net assets in high-quality
tax-exempt municipal securities with independent credit ratings of Aaa, Aa,
A/AAA, AA, A (and their unrated equivalents). The fund may also invest up to 10%
of its assets in debt securities rated lower than Baa/BBB, but will not purchase
any bonds rated below B. The fund has the flexibility to invest in municipal
securities with short- (dollar-weighted average effective maturity between one
and five years), medium- (five and 10 years), and long-term (more than 10 years)
maturities. During recent years, the fund's portfolio has been invested
primarily in long-term municipal bonds. In managing its portfolio, the fund
attempts to take advantage of opportunities in the market caused by such factors
as temporary yield disparities among issues or classes of securities in an
attempt to improve total return.
The portfolio management team will sell a security from the fund's portfolio
under certain circumstances, including: declining credit
9
<PAGE>
condition of a holding; to adjust the duration of the fund's portfolio or to
sell a security with a maturity in an unattractive part of the yield curve; to
raise cash to meet redemptions; to purchase a bond with better value, improved
structure or liquidity; and, when market conditions generate a higher than
normal price for a security.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, make the
following investments:
The fund may invest more than 25% of its assets in industrial development or
other private activity bonds, subject to the fund's 20% limitation on investing
in municipal securities whose investment income is taxable or subject to the
alternative minimum tax and the fund's current intention not to invest in
municipal securities whose investment income is subject to regular federal
income tax. The fund may, but is not required to, invest up to 20% of its assets
in cash or invested in short-term taxable investments, including U.S. Government
obligations and money market instruments. Normally, however, the fund expects to
be fully invested in tax-exempt securities.
The fund may utilize other investments and investment techniques that may impact
performance, including, but not limited to, options, futures and other
derivatives (financial investments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund manages its exposure to interest rate risk by adjusting its duration.
Duration, expressed in years, is based on the estimated payback period of income
and principal of a bond (or portfolio of bonds) and is the most widely used
gauge of sensitivity to interest rate change. The longer a fund's duration, the
more sharply its price is likely to rise or fall when interest rates change. The
fund primarily invests in long-term municipal securities, however, it can
purchase both short- and medium-term municipal securities.
The fund minimizes its exposure to credit risk by investing at least 65% of its
net assets in the three highest rated bond categories.
The fund may, but is not required to, use certain derivatives (or unrated
equivalents) in an attempt to manage risk. The use of certain derivatives could
magnify losses.
For temporary defensive purposes, the fund may invest more than 20% of its total
assets in taxable securities. In such a case, the fund would not be pursuing,
and may not achieve, its investment objective.
10
<PAGE>
Main risks
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, as with most tax-free bond funds, a major
factor affecting the fund's performance is interest rates. Because this fund
intends to have a longer duration, the interest rate risk is greater in this
fund than in a fund that does not intend to be principally invested in municipal
securities with long-term maturities. When interest rates rise, the price of
bonds (and tax-free bond funds) typically fall in proportion to their duration.
The fund may have lower returns than other funds that invest in lower-quality
municipal securities. Municipal securities in the fund's portfolio could be
downgraded or go into default.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time. It is possible to lose money
invested in the fund.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1989.................... 11.19%
1990.................... 6.77%
1991.................... 12.23%
1992.................... 8.98%
1993.................... 13.32%
1994.................... -6.04%
1995.................... 17.12%
1996.................... 4.15%
1997.................... 9.29%
1998.................... 6.23%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 6.69% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was -6.17% (the first quarter of 1994).
11
<PAGE>
Average annual total returns
For periods ended Scudder Managed Lehman Brothers Municipal
December 31, 1998 Municipal Bonds Bond Index
- --------------------------------------------------------------------------------
One Year 6.23% 6.48%
Five Years 5.88% 6.22%
Ten Years 8.15% 8.22%
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index is an unmanaged market value-weighted
measure of municipal bonds issued across the United States. Index issues have a
credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike fund returns, do not
reflect any fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of offering
price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.51%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.11%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 0.62%
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
12
<PAGE>
- --------------------------------------------------------------------------------
One Year $ 63
- --------------------------------------------------------------------------------
Three Years $ 199
- --------------------------------------------------------------------------------
Five Years $ 346
- --------------------------------------------------------------------------------
Ten Years $ 774
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
Scudder High Yield Tax Free Fund
Investment objective
Scudder High Yield Tax Free Fund seeks to produce a high level of income, exempt
from regular federal income tax, from an actively managed portfolio consisting
primarily of investment-grade municipal securities. Unless otherwise indicated,
the fund's investment objectives and policies may be changed without a vote of
shareholders.
Main investment strategies
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 be invested in
municipal securities. Under normal market conditions, however, each fund expects
to invest 100% of its portfolio securities in municipal securities. Municipal
securities include notes and bonds issued by states, cities and towns to raise
revenue for various public shares. The fund invests in municipal securities that
are debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their
subdivisions, agencies and instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax. The fund
pursues its goal by investing at least 50% of its assets in tax-exempt municipal
securities with independent credit ratings of Aaa, Aa, A, Baa/AAA, AA, A, BBB
(and their unrated equivalents). The fund may invest, however, up to 50% of its
total assets in bonds rated below Baa/BBB, but will not purchase any debt
securities rated below B. The fund expects to invest principally in municipal
securities with long-term maturities (more than 10 years), however, the fund has
the flexibility to invest in municipal securities with short- (between one and
five) and medium-term (between five and ten) maturities as well.
The portfolio management team will sell a security from the fund's portfolio
under certain circumstances, including: declining credit condition of a holding;
to adjust the duration of the fund's portfolio or to sell a security with a
maturity in an unattractive part of the yield curve; to raise cash to meet
redemptions; to purchase a bond with better value, improved structure or
liquidity; and, when market conditions generate a higher than normal price for a
security.
13
<PAGE>
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, make the
following investments:
The fund may invest more than 25% of its assets in industrial development or
other private activity bonds, subject to the fund's 20% limitation on investing
in municipal securities whose investment income is taxable or subject to the
alternative minimum tax and the fund's current intention not to invest in
municipal securities whose investment income is subject to regular federal
income tax.
The fund may utilize other investments and investment techniques that may impact
performance, including, but not limited to, options, futures and other
derivatives (financial investments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund manages its exposure to interest rate risk by adjusting its duration.
Duration, expressed in years, is based on the estimated payback period of income
and principal of a bond (or portfolio of bonds) and is the most widely used
gauge of sensitivity to interest rate change. The longer a fund's duration, the
more sharply its price is likely to rise or fall when interest rates change. The
fund minimizes its exposure to credit risk by investing at least 50% of its net
assets in investment grade bonds.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest more than 20% of its total
assets in taxable securities. In such a case, the fund would not be pursuing its
goal and may not achieve its investment objective.
Main risks
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, as with most tax-free bond funds, a major
factor affecting the fund's performance is interest rates. Because this fund
intends to have a longer duration, the interest rate risk is greater in this
fund than in a fund that does not intend to be principally invested in municipal
securities with long-term maturities. When interest rates rise, the price of
bonds (and tax-free bond funds)
14
<PAGE>
typically fall in proportion to their duration. The fund could have greater
losses than other funds that invest a greater portion in higher-grade municipal
securities. The fund may have lower returns than other funds that invest in
lower-quality municipal securities. Municipal securities in the fund's portfolio
could be downgraded or go into default. There are market and investment risks
with any security and the value of an investment in the fund will fluctuate over
time. It is possible to lose money invested in the fund. Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1989.................... 10.32%
1990.................... 6.02%
1991.................... 13.46%
1992.................... 10.88%
1993.................... 13.85%
1994.................... -8.38%
1995.................... 19.28%
1996.................... 4.43%
1997.................... 12.04%
1998.................... 6.38%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 8.46% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was -6.37% (the first quarter of 1994).
Average annual total returns
For periods ended Scudder High Yield Tax Lehman Brothers Municipal
December 31, 1998 Free Fund Bond Index
- --------------------------------------------------------------------------------
One Year 6.38% 6.48%
Five Years 6.35% 6.22%
Ten Years 8.58% 8.22%
- --------------------------------------------------------------------------------
15
<PAGE>
Lehman Brothers Municipal Bond Index is an unmanaged market value-weighted
measure of municipal bonds issued across the United States. Index issues have a
credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike fund returns, do not
reflect any fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of offering
price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.64%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.20%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 0.84%
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
- --------------------------------------------------------------------------------
One Year $ 86
- --------------------------------------------------------------------------------
Three Years $ 268
- --------------------------------------------------------------------------------
Five Years $ 466
- --------------------------------------------------------------------------------
Ten Years $ 1,037
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
16
<PAGE>
A message from the President
[PHOTO]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $280 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Edmond D. Villani
17
<PAGE>
Investment adviser
Each fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), Two International Place, Boston, MA, to manage the funds'
daily investment and business affairs subject to the policies established by
each fund's Board. The Adviser actively manages each fund's investments.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities.
Scudder Limited Term Tax Free Fund
The Adviser agreed to maintain the annualized expenses of the fund at no more
than 0.75% of the average daily net assets of the fund until September 30, 1999.
As a result, the Adviser received an investment management fee of 0.53% of the
fund's average daily net assets on an annual basis for the fiscal year ended
October 31, 1998.
All other funds
For the fiscal year ended December 31, 1998, the Adviser received investment
management fees of 0.57%, 0.51%, and 0.64% of each fund's average daily net
assets on an annual basis for Scudder Medium Term Tax Free Fund, Scudder Managed
Municipal Bonds and Scudder High Yield Tax Free Fund, respectively.
Portfolio management
Each fund is managed by a team of investment professionals, who each plays an
important role in the fund's management process. Team members work together to
develop investment strategies and select securities for each fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits fund investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with each fund as
indicated:
Scudder Limited Term Tax Free Fund
Name and Title Joined the Fund Responsibilities and Background
- --------------------------------------------------------------------------------
Ashton P. Goodfield 1994 Ms. Goodfield joined the Adviser in
Lead Manager 1986 and has been a portfolio manager
since 1990.
K. Sue Cote 1998 Ms. Cote joined the Adviser in 1983 as
Manager a research assistant and has been a
portfolio manager since 1986.
- --------------------------------------------------------------------------------
18
<PAGE>
Scudder Medium Term Tax Free Fund
Name and Title Joined the Fund Responsibilities and Background
- --------------------------------------------------------------------------------
Ashton P. Goodfield 1998 Ms. Goodfield joined the Adviser in
Lead Manager 1986 and has been a portfolio manager
since 1990.
Philip G. Condon 1998 Mr. Condon joined the Adviser in 1983
Manager as a portfolio manager and has 17
years of experience in municipal
investing and portfolio management.
- --------------------------------------------------------------------------------
Scudder Managed Municipal Bonds
Name and Title Joined the Fund Responsibilities and Background
- --------------------------------------------------------------------------------
Philip G. Condon Lead 1998 Mr. Condon joined the Adviser in 1983
Manager as a portfolio manager and has 17
years of experience in municipal
investing and portfolio management.
Ashton P. Goodfield 1998 Ms. Goodfield joined the Adviser in
Manager 1986 and has been a portfolio manager
since 1990.
- --------------------------------------------------------------------------------
Scudder High Yield Tax Free Fund
Name and Title Joined the Fund Responsibilities and Background
- --------------------------------------------------------------------------------
Philip G. Condon Lead 1987 Mr. Condon joined the Adviser in 1983
Manager as a portfolio manager and has 17
years of experience in municipal
investing and portfolio management.
Rebecca L. Wilson 1998 Ms. Wilson joined the Adviser in 1986
Manager and has over 12 years of experience in
municipal investing and research.
- --------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, each
fund could be adversely affected if computer systems on which each fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to process correctly date-related information on
and after January 1, 2000. The risk is commonly called the Year 2000 issue.
Failure to address successfully the Year 2000 issue could result in
interruptions to and other material adverse effects on each fund's business and
operations, such as problems with calculating net asset value and difficulties
in implementing the fund's purchase and redemption procedures. The Adviser has
commenced a review of the Year 2000 issue as it may affect the funds and is
taking steps it believes are reasonably designed to
19
<PAGE>
address the Year 2000 issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 issue will not have an adverse effect on the issuers whose securities are
held by each fund or on global markets or economies generally.
Distributions
Each fund intends to distribute dividends from its net investment income
monthly. Each fund intends to distribute net realized capital gains after
utilization of capital loss carryforwards, if any, in November or December. An
additional distribution may be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar year declared.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a fund. Distributions may be subject to
federal income tax whether received in cash or reinvested. Exchanges among funds
are also taxable events.
Taxes
Generally, dividends from tax-exempt income are not subject to federal income
taxes, except for the possible applicability of the alternative minimum tax. A
portion of each fund's income, however, including income from repurchase
agreements, gains from options, and market discount bonds, may be taxable to
shareholders as ordinary income. Long-term capital gains distributions, if any,
are taxable to shareholders as long-term capital gains, regardless of the length
of time shareholders have owned shares. Short-term capital gains and any other
taxable income distributions are taxable as ordinary income. Distributions of
tax-exempt income are taken into consideration in computing the portion, if any,
of Social Security and railroad retirement benefits subject to federal and, in
some cases, state taxes.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss if the shares were held as a capital asset. Capital gains may be
long-term or short-term, depending on how long you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.
20
<PAGE>
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
21
<PAGE>
Financial highlights
The following financial highlights tables are intended to help you understand
each fund's financial performance for the fiscal periods indicated. Certain
information reflects financial results for a single fund share. The total return
figures represent the rate that a shareholder would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP whose report,
along with the fund's financial statements, is included in the annual report,
which is available upon request by calling Scudder Investor Relations at
1-800-225-2470 or, for existing shareholders, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890.
Scudder Limited Term Tax Free Fund
- --------------------------------------------------------------------------------
Years Ended October 31, For the
Period
February 15,
1994
(commence-
ment of
operations)
to October
1998 1997 1996 1995 31, 1994
- --------------------------------------------------------------------------------
Net asset value, beginning of ------------------------------------------
period ......................... $12.12 $11.98 $12.01 $11.67 $12.00
------------------------------------------
Income from investment
operations:
Net investment income ............ .50 .52 .53 .56 .38
Net realized and unrealized gain
(loss) on investments .......... .15 .16 (.02) .34 (.33)
------------------------------------------
Total from investment operations . .65 .68 .51 .90 .05
------------------------------------------
Less distributions from:
Net investment income ............ (.50) (.52) (.53) (.56) (.38)
Net realized gain on investment
transactions ................... (.01) (.02) (.01) -- --
------------------------------------------
Total distributions .............. (.51) (.54) (.54) (.56) (.38)
------------------------------------------
Net asset value, end of period ... $12.26 $12.12 $11.98 $12.01 $11.67
- ------------------------------------------------------------------------------
Total Return (%) (a) ............. 5.37 5.89 4.33 7.94 .44**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 129 117 124 122 68
Ratio of operating expenses, net
to average daily net assets (%) .75 .75 .63 .23 --
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .82 .83 .82 .85 1.29*
Ratio of net investment income to
average daily net assets (%) ... 4.12 4.32 4.46 4.78 4.84*
Portfolio turnover rate (%) ...... 23.2 17.8 37.7 37.5 36.3
* Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
- --------------------------------------------------------------------------------
22
<PAGE>
Scudder Medium Term Tax Free Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of --------------------------------------------
period ........................... $11.41 $11.15 $11.26 $10.39 $11.36
--------------------------------------------
Income from investment operations:
Net investment income .............. .52 .52 .53 .54 .53
Net realized and unrealized gain
(loss) on investments ............ .11 .31 (.09) .92 (.92)
--------------------------------------------
Total from investment operations ... .63 .83 .44 1.46 (.39)
--------------------------------------------
Less distributions:
From net investment income ......... (.52) (.52) (.53) (.54) (.53)
From net realized gains on
investments ...................... (.04) (.05) (.02) (.05) (.05)
--------------------------------------------
Total distributions ................ (.56) (.57) (.55) (.59) (.58)
--------------------------------------------
--------------------------------------------
Net asset value, end of period ..... $11.48 $11.41 $11.15 $11.26 $10.39
- ----------------------------------------------------------------------------------
Total Return (%) ................... 5.58 7.69 4.02 14.32(a) (3.50)(a)
Ratios and Supplemental Data
Net assets, end of period
($ millions) ..................... 678 657 651 712 701
Ratio of operating expenses net,
to average daily net assets (%) .. .72 .74 .72 .70 .63
Ratio of operating expenses before
expense reductions, to average
daily net assets ................. .72 .74 .72 .72 .71
Ratio of net investment income to
average daily net assets (%) ..... 4.51 4.67 4.75 4.92 4.94
Portfolio turnover rate (%) ........ 10.75 13.4 14.1 36.1 33.8
</TABLE>
(a) Total returns may have been lower had certain expenses not been reduced.
- --------------------------------------------------------------------------------
23
<PAGE>
Scudder Managed Municipal Bonds
- --------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
Net asset value, beginning of period .. $9.13 $8.84 $8.94 $8.07 $9.09
-------------------------------------
Income from investment operations:
Net investment income ................. .45 .46 .45 .48 .46
Net realized and unrealized gain
(loss) on
investment transactions ............. .10 .34 (.10) .87 (1.00)
-------------------------------------
Total from investment operations ...... .55 .80 .35 1.35 (.54)
-------------------------------------
Less distributions:
From net investment income ............ (.45) (.46) (.45) (.48) (.46)
From net realized gains on
investment transactions ............. (.05) (.05) -- -- (.02)
-------------------------------------
Total distributions ................... (.50) (.51) (.45) (.48) (.48)
-------------------------------------
-------------------------------------
Net asset value, end of period ........ $9.18 $9.13 $8.84 $8.94 $8.07
- ------------------------------------------------------------------------------
Total Return (%) ...................... 6.23 9.29 4.15 17.12 (6.04)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 737 728 737 775 709
Ratio of operating expenses to
average net assets (%) .............. .62 .64 .63 .63 .63
Ratio of net investment income to
average net assets (%) .............. 4.96 5.12 5.20 5.59 5.41
Portfolio turnover rate (%) ........... 8.6 9.8 12.2 17.8 33.7
- --------------------------------------------------------------------------------
24
<PAGE>
Scudder High Yield Tax Free Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
----------------------------------------------
Net asset value, beginning of period . $12.78 $12.04 $12.19 $10.86 $12.55
----------------------------------------------
Income from investment operations:
Net investment income ................ .65 .67 .66 .68 .70
Net realized and unrealized gain
(loss) on investment transactions .. .15 .74 (.15) 1.37 (1.73)
----------------------------------------------
Total from investment operations ..... .80 1.41 .51 2.05 (1.03)
----------------------------------------------
Less distributions from net
investment income .................. (.65) (.67) (.66) (.72) (.66)
----------------------------------------------
Net asset value, end of period ....... $12.93 $12.78 $12.04 $12.19 $10.86
- --------------------------------------------------------------------------------------
Total Return (%) ..................... 6.38 12.04 4.43(a) 19.28(a) (8.38)(a)
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 432 337 293 304 260
Ratio of operating expenses, net to
average daily net assets (%) ....... .84 .90 .91 .80 .80
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............... .84 .90 .95 .94 .97
Ratio of net investment income to
average net assets (%) ............. 5.03 5.43 5.59 5.77 6.01
Portfolio turnover rate (%) .......... 14.32 33.2 21.9 27.3 34.3
</TABLE>
(a) Total return would have been lower had certain expenses not been reduced.
- --------------------------------------------------------------------------------
25
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
each fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading.
Net asset value per share is calculated by dividing the value of total fund
assets, less all liabilities, by the total number of shares outstanding. Market
prices are used to determine the value of a fund's assets. If market prices are
not readily available for a security or if a security's price is not considered
to be market indicative, that security may be valued by another method that the
Board or its delegate believes accurately reflects fair value. In those
circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
Processing time
All purchase and redemption requests received in good order at each fund's
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value per share calculated at the close of trading
that day. All other requests that are in good order will be executed the
following business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. Each fund will normally send
redemption proceeds within one business day following the redemption request,
but may take up to seven business days (or longer in the case of shares recently
purchased by check). For more information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. Each
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in a fund's share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in a fund and have not established an automatic
26
<PAGE>
investment plan will be assessed an annual $10.00 per fund charge; this fee is
paid to the relevant fund. Each fund reserves the right, following 60 days
written notice to shareholders, to redeem all shares in accounts that have a
value below $1,000 where such a reduction in value has occurred due to a
redemption, exchange or transfer out of the account.
Write-a-check
You may redeem shares of Scudder Limited Term Tax Free Fund and Scudder Medium
Term Tax Free Fund by writing checks against your account for at least $100.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
27
<PAGE>
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston,
Chicago, New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number
and the complete fund name, to the appropriate address
listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor
Center locations are listed above.
- --------------------------------------------------------------------------------
By Telephone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
28
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the
Scudder Automated Information Line, call 1-800-343-2890
(24 hours a day).
- --------------------------------------------------------------------------------
By Mail or Fax Print or type your instructions and include:
- the name of the fund and the account number you are
exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the
Scudder Automated Information Line, call 1-800-343-2890 (24
hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate
or Fax address or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
Write-a-check You may redeem shares of Scudder Limited Term Tax Free Fund
and Scudder Medium Term Tax Free Fund by writing checks
against your account balance for at least $100, but not more
than $5,000,000.
- --------------------------------------------------------------------------------
By Automatic You may arrange to receive automatic cash payments
Withdrawal Plan periodically. Call 1-800-225-5163 for more information and an
enrollment form.
- --------------------------------------------------------------------------------
29
<PAGE>
Investment products and services
The Scudder Family of Funds[
- --------------------------------------------------------------------------------
Money Market
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series -- Managed Shares*
Tax Free Money Market+
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series -- Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth 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 Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
30
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**[[
Scudder Horizon Advantage**[[[
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
[ Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
[[ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
[[[ A no-load variable annuity contract issued by Glenbrook Life and Annuity
Company and underwritten by Allstate Financial Services, Inc., sold by
Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various other stock
exchanges.
31
<PAGE>
Trustees and Officers
- --------------------------------------------------------------------------------
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President
and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow,
Center for Business Ethics,
Bentley College;
President, Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director
and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of
Business Administration,
Northeastern University
College of Business Administration
Kathryn L. Quirk*
Trustee; Vice President
and Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Philip G. Condon*
Vice President(1)
Ashton P. Goodfield*
Vice President(2)
Thomas W. Joseph*
Vice President
Ann M. McCreary*
Vice President
Thomas F. McDonough*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
- -----------
(1) Scudder Municipal Trust
(2) Scudder Tax Free Trust
Both trusts unless otherwise indicated.
* Scudder Kemper Investments, Inc.
32
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Additional information about each fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected a fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Telephone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Scudder Tax Free Trust Investment Company Act file number: 811-632
Scudder Municipal Trust Investment Company Act file number: 811-2671
[PRINTED WITH SOY INK LOGO] [RECYCLE LOGO] Printed on recycled paper
75-2-39
PR008399
<PAGE>
SCUDDER LIMITED TERM TAX FREE FUND
A series of Scudder Tax Free Trust
(A Series of a No-Load (No Sales Charges) Diversified Investment Company
Which Seeks to Provide as High Level of Income Exempt From Regular Federal
Income Tax as is Consistent With a High Degree of Principal Stability)
and
SCUDDER MEDIUM TERM TAX FREE FUND
A series of Scudder Tax Free Trust
(A Series of a No-Load Diversified Investment Company Specializing in the
Management of a Portfolio Primarily of High-Grade, Intermediate-Term Municipal
Securities Exempt From Federal Income Taxes, with an Emphasis on Limited
Principal Fluctuation)
and
SCUDDER MANAGED MUNICIPAL BONDS
A series of Scudder Municipal Trust
(A Series of a No-Load Diversified Investment Company Specializing in the
Management of a Portfolio of Primarily High-Grade, Long-Term
Municipal Securities)
and
SCUDDER HIGH YIELD TAX FREE FUND
A series of Scudder Municipal Trust
(A Series of a No-Load Diversified Investment Company Specializing in the
Management of a Municipal Bond Portfolio of Primarily Investment-Grade
Municipal Securities)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus. The
combined prospectus of Scudder Limited Term Tax Free Fund, Scudder Medium Term
Tax Free Fund, Scudder Managed Municipal Bonds and Scudder High Yield Tax Free
Fund, dated March 1, 1999, as amended from time to time, may be obtained by
writing without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
The Annual Reports to Shareholders of Scudder Limited Term Tax Free Fund dated
October 31, 1998; and for Scudder Medium Term Tax Free Fund, Scudder Managed
Municipal Bonds and Scudder High Yield Tax Free Fund dated December 31, 1998,
are incorporated by reference and are hereby deemed to be part of this Statement
of Additional Information.
<PAGE>
TABLE OF CONTENTS
Page
THE FUNDS AND THEIR OBJECTIVES.................................................1
General Investment Objectives and Policies of Scudder Limited Term Tax
Free Fund..............................................................1
General Investment Objectives and Policies of Scudder Medium Term Tax Free
Fund...................................................................2
General Investment Objectives and Policies of Scudder Managed Municipal
Bonds..................................................................3
General Investment Objectives and Policies of Scudder High Yield Tax Free
Fund...................................................................4
Risk Factors..............................................................5
Master/Feeder Structure...................................................6
Investments and Investment Techniques Common to the Funds.................6
Trustees' Power to Change Objectives and Policies........................17
Investment Restrictions..................................................17
PURCHASES.....................................................................18
Additional Information About Opening an Account..........................18
Minimum balances.........................................................18
Additional Information About Making Subsequent Investments...............19
Checks...................................................................19
Wire Transfer of Federal Funds...........................................19
Additional Information About Making Subsequent Investments by QuickBuy...20
Share Price..............................................................20
Share Certificates.......................................................20
Other Information........................................................20
EXCHANGES AND REDEMPTIONS.....................................................21
Exchanges................................................................21
Redemption by Telephone..................................................22
Redemption By QuickSell..................................................22
Redemption by Mail or Fax................................................23
Redemption by Write-A-Check..............................................23
Other Information........................................................23
FEATURES AND SERVICES OFFERED BY THE FUNDS....................................24
The Pure No-Load(TM) Concept.............................................24
Internet Access..........................................................25
Dividend and Capital Gain Distribution Options...........................25
Scudder Investor Centers.................................................26
Reports to Shareholders..................................................26
Diversification..........................................................26
Transaction Summaries....................................................26
THE SCUDDER FAMILY OF FUNDS...................................................26
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.....................................................................32
PERFORMANCE INFORMATION.......................................................32
Tax-Exempt Income vs. Taxable Income.....................................35
Comparison of Fund Performance...........................................36
ORGANIZATION OF THE FUNDS.....................................................39
i
<PAGE>
TABLE OF CONTENTS (contents)
Page
INVESTMENT ADVISER............................................................40
Personal Investments by Employees of the Adviser.........................44
TRUSTEES AND OFFICERS.........................................................44
REMUNERATION..................................................................47
Responsibilities of the Board -- Board and Committee Meetings............47
Compensation of Officers and Trustees....................................47
DISTRIBUTOR...................................................................48
TAXES.........................................................................49
PORTFOLIO TRANSACTIONS........................................................52
Brokerage Commissions....................................................52
Portfolio Turnover.......................................................53
NET ASSET VALUE...............................................................53
ADDITIONAL INFORMATION........................................................54
Experts..................................................................54
Shareholder Indemnification..............................................54
Ratings of Municipal Obligations.........................................54
Commercial Paper Ratings.................................................55
Glossary.................................................................56
Other Information........................................................57
FINANCIAL STATEMENTS..........................................................58
Scudder Limited Term Tax Free Fund.......................................58
Scudder Medium Term Tax Free Fund........................................59
Scudder Managed Municipal Bonds..........................................59
Scudder High Yield Tax Free Fund.........................................59
ii
<PAGE>
THE FUNDS AND THEIR OBJECTIVES
(See "Scudder Limited Term Tax Free Fund -- Investment Objective" "Investment
Strategy" and "Other Investments"
"Scudder Medium Term Tax Free Fund -- Investment Objective" "Investment
Strategy" and "Other Investments,"
"Scudder Managed Municipal Bonds -- Investment Objective" "Investment
Strategy" and "Other Investments,"
"Scudder High Yield Tax Free Fund -- Investment Objective" "Investment
Strategy" and "Other Investments"
in the Funds' prospectus.)
Scudder Tax Free Trust, the Massachusetts business trust of which Scudder
Limited Term Tax Free Fund and Scudder Medium Term Tax Free Fund are series, is
referred to herein as "STFT." Scudder Limited Term Tax Free Fund, a series of
STFT, sometimes is referred to herein as "SLTTFF." Scudder Medium Term Tax Free
Fund, a series of STFT, sometimes is referred to herein as "SMTTFF." Scudder
Municipal Trust, the Massachusetts business trust of which Scudder Managed
Municipal Bonds and Scudder High Yield Tax Free Fund are series, is referred to
herein as "SMT." Scudder Managed Municipal Bonds, a series of SMT, sometimes is
referred to herein as "SMMB." Scudder High Yield Tax Free Fund, a series of SMT,
is sometimes referred to herein as "SHYTFF." SLTTFF, SMTTFF, SMMB and SHYTFF
sometimes are referred to individually as a "Fund" and jointly as "the Funds."
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 fund 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 Limited Term Tax Free Fund
Scudder Limited Term Tax Free Fund, a diversified series of Scudder Tax
Free Trust, seeks to provide as high a level of income exempt from regular
federal income tax as is consistent with a high degree of principal stability.
In pursuing this goal, the Fund maintains a diversified portfolio of
shorter-term, high-grade municipal debt securities with a dollar-weighted
average effective maturity of between one and five years. Within this
limitation, the Fund may not purchase individual securities with effective
maturities greater than 10 years at the time of purchase or issuance, whichever
is later. To the extent the Fund invests in higher-grade securities, it will be
unable to avail itself of opportunities for higher income which may be available
with lower-grade investments.
The Fund's price and yield can fluctuate daily in response to changing
bond market conditions.
SLTTFF Investments. The Fund invests in municipal securities that are debt
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their subdivisions, agencies and
instrumentalities, the interest on which is, in the opinion of bond counsel,
exempt from regular federal income tax. These securities include municipal
notes, which are generally used to provide short-term capital needs and have
maturities of one year or less. Municipal notes include tax anticipation notes,
revenue anticipation notes, bond anticipation notes and construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include general obligation bonds which are secured by the
issuer's pledge of its faith, credit and taxing power for payment of principal
and interest, revenue bonds, industrial development and other private activity
bonds.
The Fund purchases securities that it believes are attractive and
competitive values in terms of quality, yield and the relationship of current
price to maturity value. However, recognizing the dynamics of municipal
obligation prices in response to changes in general economic conditions, fiscal
and monetary policies, interest rate levels and market forces such as supply and
demand for various issues, the Adviser, subject to the Trustees' supervision,
performs credit analysis and manages the Fund's portfolio continuously,
attempting to take advantage of opportunities to improve total return, which is
a combination of income and principal performance over the long term.
<PAGE>
For federal income tax purposes, the income earned from municipal
securities may be entirely tax-free, taxable or subject to only the alternative
minimum tax. However, the Fund has no current intention of investing in
municipal securities whose interest income is taxable or AMT bonds.
Normally, the Fund invests at least 65% of its net assets in municipal
securities which are rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund will not invest in any debt security rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser. The Fund may, however, invest in a debt security so rated by one rating
agency even though the security may be rated lower by one or more of the other
agencies.
Securities must also meet credit standards applied by the Adviser. Should
the rating of a portfolio security be downgraded after being purchased by the
Fund, the Adviser will determine whether it is in the best interest of the Fund
to retain or dispose of the security.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's total assets will normally be
invested in municipal securities and, under normal market conditions, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
However, for temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may temporarily invest more than 20% of its assets in taxable
securities during periods which, in the Adviser's opinion, require a defensive
position. A portion of the Fund's income may be subject to regular federal,
state and local income taxes. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in third party puts, municipal lease obligations,
variable rate demand instruments and when-issued or forward delivery securities,
may purchase warrants to purchase debt securities, may enter into repurchase
agreements and may also engage in strategic transactions.
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 effective maturity of the Fund's portfolio
will range between five and 10 years. Within this limitation, the Fund may not
purchase individual securities with effective maturities greater than 15 years.
To the extent the Fund invests in high-grade securities, it will be unable to
avail itself of opportunities for higher income which may be available with
lower-grade investments.
SMTTFF Investments. The municipal securities in which the Fund may invest are
debt obligations issued by or on behalf of states, territories and possessions
of the United States, the District of Columbia and their subdivisions, agencies
and instrumentalities, the interest on which is exempt from federal income tax.
Such municipal securities include municipal notes, which are generally used to
provide short-term capital needs and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include general obligation bonds which are secured by the
issuer's pledge of its faith, credit and taxing power for payment of principal
and interest, revenue bonds, prerefunded bonds, industrial development and other
private activity bonds. The Fund may also invest in variable rate demand
instruments.
The Fund may invest more than 25% of its assets in industrial development
or other private activity bonds, subject to the Fund's fundamental investment
policies, and also subject to the Fund's current intention not to invest in
municipal securities whose investment income is taxable or AMT bonds. For
purposes of the Fund's investment limitation regarding concentration of
investments in any one industry, industrial development or other private
activity,
2
<PAGE>
bonds ultimately payable by companies within the same industry will be
considered as if they were issued by issuers in the same industry.
Normally, the Fund invests at least 65% of its net assets in municipal
bonds which are rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund will not invest in any debt security rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser. The Fund may, however, invest in a debt security so rated by one rating
agency even though the security may be rated lower by one or more of the other
agencies.
Securities must also meet credit standards applied by the Adviser. Should
the rating of a portfolio security be downgraded after being purchased by the
Fund, the Adviser will determine whether it is in the best interest of the Fund
to retain or dispose of the security.
At least 80% of the Fund's total assets will normally be invested in
municipal bonds and, under normal market conditions, the Fund expects to invest
100% of its portfolio securities in municipal securities. However, for temporary
defensive purposes or if an unusual disparity between after-tax income on
taxable and municipal securities makes it advisable, up to 20% of the Fund's
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments. The Fund may
temporarily invest more than 20% of its assets in taxable securities during
periods which, in the Adviser's opinion, require a defensive position. A portion
of the Fund's income may be subject to regular federal, state and local income
taxes. It is impossible to predict how long such alternative strategies may be
utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, reverse repurchase agreements, municipal lease
obligations, variable rate demand instruments and when-issued or forward
delivery securities, may purchase warrants to purchase debt securities, and may
also engage in strategic transactions.
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 primarily
through investments in high-grade, long-term municipal securities.
The Fund attempts to take advantage of opportunities in the market caused
by such factors as temporary yield disparities among individual issues or
classes of securities in an effort to achieve better capital performance than
that of an unmanaged portfolio of municipal bonds.
All income distributed by the Fund is expected to be exempt from federal
income taxes, but income may be subject to state and local income taxes.
Ordinarily, the Fund expects that 100% of its portfolio securities will be in
federally tax-exempt securities although a small portion of its income may be
subject to regular federal or alternative minimum tax.
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 bonds. Under normal market conditions, the Fund expects
to invest 100% of its portfolio in municipal securities. The Fund has the
flexibility to invest in municipal securities with short-, medium- and long-term
maturities. During recent years, its portfolio has been invested primarily in
long-term municipal bonds.
The municipal securities in which 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
3
<PAGE>
pollution control bonds. The Fund may also invest in other municipal securities
such as variable rate demand instruments.
The Fund may invest more than 25% of its assets in industrial development
or other private activity bonds, subject to the Fund's fundamental investment
policies, and also subject to the Fund's 20% limitation on investing in
municipal securities whose investment income is taxable or AMT bonds and the
Fund's current intention not to invest in municipal securities whose investment
income is subject to regular federal income tax. For purposes of the Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
Normally, the Fund invests at least 65% of its net assets in securities
rated, or issued by an issuer rated, within the three highest quality rating
categories of Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their
equivalents, or if unrated, judged by the Adviser, to be of comparable quality
at the time of purchase. The Fund may invest up to 10% of its assets in debt
securities rated lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent
quality as determined by the Adviser, but will not purchase bonds rated below B
by Moody's, S&P or Fitch, or their equivalent. Unrated obligations will be
purchased only if they are considered to be of a quality comparable to
obligations rated as described above and are readily marketable. Securities must
also meet credit standards applied by the Adviser. Should the rating of a
portfolio security be downgraded after being purchased by the Fund, the Adviser
will determine whether it is in the best interest of the Fund to retain or
dispose of the security. For temporary defensive purposes or if an unusual
disparity between after-tax income on taxable and municipal securities makes it
advisable, up to 20% of the Fund's assets may be held in cash or invested in
short-term taxable investments, including U.S. Government obligations and money
market instruments. The Fund may invest more than 20% of its assets in taxable
securities to meet temporary liquidity requirements. It is impossible to predict
how long such alternative strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, municipal lease obligations, variable rate demand
instruments and when-issued or forward delivery securities, may purchase
warrants to purchase debt securities, and may also engage in strategic
transactions.
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, from an actively managed portfolio consisting primarily of
investment-grade municipal securities.
The Fund will invest at least 50% of its assets in municipal bonds rated,
at the time of purchase, within the four highest quality rating categories of
Moody's (Aaa, Aa, A or Baa), S&P or Fitch (AAA, AA, A or BBB), or their
equivalents as determined by the Adviser. The Fund may invest, however, up to
50% of its total assets in bonds rated below Baa by Moody's or below BBB by S&P
or Fitch, or unrated securities considered to be of equivalent quality. The Fund
may not invest in bonds rated below B by Moody's, S&P or Fitch, or their
equivalent. Should the rating of a portfolio security be downgraded after being
purchased by the Fund, the Adviser will determine whether it is in the best
interest of the Fund to retain or dispose of the security.
During the fiscal year ended December 31, 1998, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio was rated as
follows: 35% AAA, 11% AA, 10% A, 22% BBB, 22% not rated or below BBB. The bonds
are rated by Moody's, S&P, or of equivalent quality as determined by the
Adviser. A large portion of the Fund's bond holdings may trade at substantial
discounts from face value.
High quality bonds, those within the two highest quality rating categories,
characteristically have a strong capacity to pay interest and repay principal.
Medium-grade bonds, those within the next two such categories, are defined as
having adequate capacity to pay interest and repay principal. Lower-grade bonds
(so-called "junk bonds"), those rated below Baa by Moody's or BBB by S&P or
Fitch, involve greater price variability and a higher degree of speculation with
respect to the payment of principal and interest. Although some have produced
higher yields in the past than the investment-grade bonds in which the Fund
primarily invests, lower-grade bonds are considered to be predominantly
speculative and, therefore, carry greater risk.
The Fund expects to invest primarily in medium-grade bonds. For temporary
defensive purposes, the Fund may vary from its investment policies during
periods when the Adviser determines that it is advisable to do so because of
conditions in the securities markets or other economic or political conditions.
During such periods the Fund may
4
<PAGE>
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.
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. The Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to the Fund's fundamental investment policies, and also subject
to the Fund's 20% limitation on investing in AMT bonds and the Fund's current
intention not to invest in municipal securities whose investment income is
subject to regular federal income tax. For purposes of the Fund's investment
limitation regarding concentration of investments in any one industry,
industrial development or other private activity bonds ultimately payable by
companies within the same industry will be considered as if they were issued by
issuers in the same industry.
Under normal market conditions, the Fund expects to invest principally in
municipal securities with long-term maturities (i.e., more than 10 years). The
Fund has the flexibility, however, to invest in municipal securities with
short-and medium-term maturities as well. The Fund may invest more than 20% of
its total assets in taxable securities to meet temporary liquidity requirements.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, municipal lease obligations, variable rate demand
instruments and when-issued or forward delivery securities and may also engage
in strategic transactions.
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.
Risk Factors
High Yield, High Risk Securities. Below investment-grade securities (rated Ba
and lower by Moody's and BB and lower by S&P) or unrated securities of
equivalent quality, in which the Fund may invest carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories and are considered speculative. The lower the ratings of such debt
securities, the greater their risks. See the Appendix to this Statement of
Additional Information for a more complete description of the ratings assigned
by ratings organizations and their respective characteristics.
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.
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The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
Master/Feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques Common to the Funds
As discussed below, the following description of investments and
investment techniques is applicable to more than one of the Funds.
Municipal Securities. Municipal Securities are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on these obligations is generally exempt from federal
income tax in the hands of most investors, except for the possible applicability
of the alternative minimum tax. The two principal classifications of municipal
securities are "Notes" and "Bonds."
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
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Administration under "Fannie Mae" (the Federal National Mortgage Association) or
"Ginnie Mae" (the Government National Mortgage Association). There are, of
course, a number of other types of notes issued for different purposes and
secured differently from those described above.
2. Municipal Bonds. Municipal bonds, which meet longer term capital needs
and generally have maturities of more than one year when issued, have two
principal classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected. Each Fund, with the exception of SLTTFF, may invest more than 25%
of its assets in industrial development or other private activity bonds, subject
to each Fund's fundamental investment policies, and also subject to each Fund's
current intention not to invest in municipal securities whose investment income
is taxable or AMT bonds, or in the case of SHYTFF, subject to the Fund's 20%
limitation on investing in AMT bonds. For the purposes of each Fund's investment
limitation regarding concentration of investments in any one industry,
industrial development or other private activity bonds ultimately payable by
companies within the same industry will be considered as if they were issued by
issuers in the same industry.
3. Municipal Lease Obligations and Participation Interests. A municipal
lease obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover the Fund's original investment.
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.
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Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by the Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace in which the
security trades. In addition, the Adviser will consider factors unique to
particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.
The Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide the Fund with the right to a pro rata undivided interest
in the underlying municipal lease obligations. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of the Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. The Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
state income tax, if applicable.
4. Other Municipal Securities. There is, in addition, a variety of hybrid
and special types of municipal securities as well as numerous differences in the
security of municipal securities both within and between the two principal
classifications above.
The Funds may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Fund, or (3) to maintain a
high quality investment portfolio or (4) to maximize the Fund's yield. A bank
that issues a repurchase commitment may receive a fee from a Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that a Fund may purchase are payable
on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Funds will
determine the variable rate demand instruments that they will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
a Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of a Fund. The Adviser will
reevaluate each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet the Fund's quality
criteria.
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.
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The maturity of the variable rate demand instruments held by the Funds
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
5. General Considerations. An entire issue of Municipal Securities may be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933, as amended (the "1933
Act") prior to offer and sale unless an exemption from such registration is
available, municipal securities which are not publicly offered may nevertheless
be readily marketable. A secondary market exists for municipal securities which
were not publicly offered initially.
Securities purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the identification
of the "issuer" of municipal securities which are not General Obligation Bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal securities whose issuers are located in the same state or
more than 25% of its total assets in municipal securities the security of which
is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; or colleges and
universities. Each Fund may invest more than 25% of its total assets in
municipal securities of one or more of the following types: public housing
authorities; general obligations of states and localities; lease rental
obligations of states and local authorities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. There could be economic, business or
political developments, which might affect all municipal securities of a similar
type. However, the Funds believe that the most important consideration affecting
risk is the quality of particular issues of municipal securities rather than
factors affecting all, or broad classes of, municipal securities.
When-Issued or Forward Delivery Securities. The Funds may purchase securities
offered on a "when-issued" or "forward delivery" basis. When so offered, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by the purchaser to the
issuer and no interest on the when-issued or forward delivery security accrues
to the purchaser. To the extent that assets of a Fund are not invested prior to
the settlement of a purchase of securities, that Fund will earn no income;
however, it is intended that each Fund will be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, it is
intended that each Fund will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Funds
do not believe that the net asset value or income of their portfolios will be
adversely affected by their purchase of securities on a when-issued or forward
delivery basis. Each Fund will establish with its custodian a segregated account
in which it will maintain cash or liquid assets, equal in value to commitments
for when-issued or forward delivery securities. Such segregated securities may
mature or be sold, if necessary, on or before the settlement date. The Funds
will not enter into such transactions for leverage purposes.
Stand-by Commitments. Each Fund, with the exception of SLTTFF, may engage in
Stand-by Commitments. SMTTFF, SMMB and SHYTFF may engage in such transactions
subject to the limitations in the rules under the Investment Company Act of
1940, as amended (the "1940 Act"). A Stand-by Commitment is a right acquired by
a Fund, when it purchases a municipal security from a broker, dealer or other
financial institution ("seller"), to sell up to the same principal amount of
such securities back to the seller, at that Fund's option, at a specified price.
Stand-by Commitments are also known as "puts." 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.
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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 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
"Service") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The Service
has also issued private letter rulings to certain taxpayers (which do not serve
as precedent for other taxpayers) to the effect that tax-exempt interest
received by a regulated investment company with respect to such obligations will
be tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The Service has subsequently
announced that it will not ordinarily issue advance ruling letters as to the
identity of the true owner of property in cases involving the sale of securities
or participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each of the Funds intends to take the position that it
owns any municipal obligations acquired subject to a Stand-by Commitment and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the Service will agree
with such position in any particular case. There is no assurance that Stand-by
Commitments will be available to the Funds nor has any of the Funds assumed that
such commitments would continue to be available under all market conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals 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
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investments, including the treatment of tender fees and swap payments, in
relation to various regulated investment company tax provisions is unclear.
However, the Adviser intends to manage the Funds' portfolios in a manner
designed to minimize any adverse impact from these investments.
Repurchase Agreements. Each Fund, with the exception of SLTTFF, may enter into
repurchase agreements with any member bank of the Federal Reserve System or any
domestic broker/dealer which is recognized as a reporting government securities
dealer if the creditworthiness of the bank or broker/dealer has been determined
by the Adviser to be at least as high as that of other issuers of obligations
the Fund may purchase or to be at least equal to that of issuers of commercial
paper rated within the two highest grades assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable income
on funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a Fund) acquires a security ("obligation") and the seller
agrees, at the time of sale, to repurchase the obligation at a specified time
and price. The repurchase price may be higher than the purchase price, the
difference being income to a Fund, or the purchase and repurchase prices may be
the same, with interest at a stated rate due to a Fund together with the
repurchase price upon repurchase. In either case, the income to a Fund (which is
taxable) is unrelated to the interest rate on the obligation itself. Obligations
will be physically held by the custodian or in the Federal Reserve Book Entry
system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by that Fund to the seller. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the obligation before repurchase of the obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the obligation. If the court characterized the transaction as a loan
and a Fund has not perfected a security interest in the obligation, that Fund
may be required to return the obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, a Fund would
be at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the obligation, in which
case a Fund may incur a loss if the proceeds to that Fund from the sale to a
third party are less than the repurchase price. However, if the market value of
the obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund involved will direct the seller
of the obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
impose on the seller a contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. SMTTFF may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. SMTTFF
will maintain a segregated account with its custodian containing cash, U.S.
Government securities and other high grade debt obligations equal in value to
its obligation in connection with outstanding reverse repurchase agreements.
Reverse repurchase agreements are borrowings subject to SMTTFF's investment
restrictions applicable to that activity.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time. While the Trustees
do not currently intend to borrow for investment leverage purposes, if such a
strategy were implemented in the future it would increase the Fund's volatility
and the risk of loss in a declining market. Borrowing by the Fund will involve
special risk considerations. Although the principal of the Fund's borrowings
will be fixed, the Fund's assets may change in value during the time a borrowing
is outstanding, thus increasing exposure to capital risk.
Strategic Transactions and Derivatives. Each Fund 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. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
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In the course of pursuing these investment strategies, the Funds may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other 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"). Strategic Transactions may be used without limit
(except to the extent that 80% of the Funds' net assets are required to be
invested in tax-exempt municipal securities, and as limited by the Funds' other
investment restrictions) to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Funds' portfolio
resulting from securities markets fluctuations, to protect the Funds' unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Funds' portfolio, or to establish a position in the derivatives markets
as a substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of each Fund's assets will be committed to Strategic Transactions entered into
for non-hedging purposes. Any or all of these investment techniques may be used
at any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Funds to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Funds will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter the fundamental investment purposes and
characteristics of the Funds and each 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 a 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 Funds, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Funds can realize on its
investments or cause the Funds to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Funds creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Funds' position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. A Fund is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the
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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)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the SEC currently takes the position that
OTC options purchased by a Fund, and portfolio securities "covering" the amount
of a Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
a Fund's limitation on investing no more than 10% of its assets in illiquid
securities.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
A Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to
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possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require a Fund to hold a security or
instrument which it might otherwise have sold.
A Fund may purchase and sell put options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. A Fund will not sell put options if, as a result, more than 50% of a
Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. A Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate or fixed-income market changes and for duration
management , for 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.
A 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 management and return enhancement purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
A Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of a Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. A Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. A Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will
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usually contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based on
the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate and index and other swaps and the purchase or
sale of related caps, floors and collars. A Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. A Fund will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream a Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as each fund will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Adviser and a Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. A Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. A Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid 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
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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
amount of cash or 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.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. (See "TAXES.")
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted or illiquid securities" or "not
readily marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public, and
in such event the Fund may be liable to purchasers of such securities if such
sale is made in violation of the 1933 Act or if the registration statement
prepared by the issuer, or the prospectus forming a part of it, is materially
inaccurate or misleading.
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The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Board of Trustees. In reaching liquidity
decisions, the Adviser will consider the following factors: (1) the frequency of
trades and quotes for the security, (2) the number of dealers wishing to
purchase or sell the security and the number of their potential purchasers, (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (i.e. the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Trustees' Power to Change Objectives and Policies
The objectives and policies of the Funds described above may be changed,
unless expressly stated to the contrary, by their respective Trustees without a
vote of their shareholders.
Investment Restrictions
Unless specified to the contrary, the following restrictions are
fundamental policies and may not be changed with respect to each of the Funds
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% of the shares
of such Fund present at a meeting if the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of such Fund. Any nonfundamental policy of a
Fund may be modified by the Fund's Trustees without a vote of the Fund's
shareholders.
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;
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.
As a matter of nonfundamental policy, each Fund may not:
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(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.
PURCHASES
(See "Purchases" and "Transaction information" in the Funds' prospectus.)
Additional Information About Opening an Account
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. ("NASD"), and banks may open an
account by wire. These investors must call 1-800-225-5163 to get an account
number. During the call, the investor will be asked to indicate the Fund name,
the amount to be wired ($2,500 minimum), the name of the bank or trust company
from which the wire will be sent, the exact registration of the new account, the
tax identification or Social Security number, address and telephone number. The
investor must then call the bank to arrange a wire transfer to The Scudder
Funds, State Street Bank and Trust Company, Boston, Massachusetts 02101 ABA
Number 011000028, DDA Account Number 9903-5552. The investor must give the
Scudder fund name, account name and the new account number. Finally, the
investor must send a completed and signed application to the Fund promptly.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500 ($1,000
for fiduciary accounts such as IRAs, and custodial accounts such as Uniform Gift
to Minor Act, and Uniform Trust to Minor Act accounts), which amount may be
changed by the 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 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 assess an annual $10 per Fund charge (with the fee to be paid to a Fund)
for any non-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than $2,500; and
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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 Funds 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. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. 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 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.
Checks
A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on or payable
through a U.S. bank.
If shares of a Fund are purchased by a check, which proves to be
uncollectible, the Trusts reserve the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by that Fund or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, such Fund will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
To purchase shares of a Fund and obtain the same day's dividend, you must
have your bank forward federal funds by wire transfer and provide the required
account information so as to be available to the Fund prior to twelve o'clock
noon eastern time on that day. If you wish to make a purchase of $500,000 or
more you should notify the Fund's transfer agent, Scudder Service Corporation
(the "Transfer Agent") of such a purchase by calling 1-800-225-5163. If either
the federal funds or the account information is received after twelve o'clock
noon eastern time but both the funds and the information are made available
before the close of regular trading on the New York Stock Exchange (the
"Exchange") (normally 4 p.m. eastern time), on any business day, shares will be
purchased at net asset value determined on that day but will not receive the
dividend; in such cases, dividends commence on the next business day.
For each Fund the bank sending an investor's federal funds by bank wire
may charge for the service. Presently the Distributor pays a fee for receipt by
State Street Bank (the "Custodian") of "wired funds," but the right to charge
investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may be
open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of a Fund.
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Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on 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, the Fund may hold the redemption proceeds for a period of
up to seven business days. If you purchase shares and there are insufficient
funds in your bank account the purchase will be canceled and you will be subject
to any losses or fees incurred in the transaction. QuickBuy transactions are not
available for most retirement plan accounts. However, QuickBuy transactions are
available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders that 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 for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share Price
Purchases will be filled without sales charge at the net asset value next
computed after receipt of a purchase order in good order. Net asset value is
normally computed as of the close of regular trading on each day the Exchange is
open for trading. Orders received after such close will be filled at the net
asset value per share on the following business day. If the order has been
placed by a member of the NASD, other than the Distributor, it is the
responsibility of that member broker, rather than a Fund, to forward the
purchase order to the Transfer Agent in Boston by the close of regular trading
on the Exchange.
Share Certificates
Due to the desire of the Funds' management to afford ease of redemption,
certificates will not be issued to indicate ownership in the Funds. Share
certificates now in a shareholder's possession may be sent to the Transfer Agent
for cancellation and credit to such shareholder's account. Shareholders who
prefer may hold the certificates in their possession until they wish to exchange
or redeem such shares.
Other Information
The Funds have authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on each Fund's behalf. Orders for purchase or redemption will be deemed
to have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at that Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Funds' principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of a Fund at any time for any reason.
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The "Tax Identification Number" section of the Funds' application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g., from exempt investors a certification of exempt status) will
be returned to the investor.
A Fund may issue shares at net asset value in connection with any merger
or consolidation with, or acquisition of, the assets of any investment company
(or series thereof) or personal holding company, subject to the requirements of
the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information"
in the Funds' prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and the
purchase of another Scudder fund to an existing account or newly established
account. When an exchange involves a new account, the new account will be
established with the same registration, tax identification number, address,
telephone redemption option, "Scudder Automated Information Line" (SAIL)
transaction authorization, and dividend option as the existing account. Other
features will not carry over automatically to the new account. Exchanges to a
new fund account must be for a minimum of $2,500. When an exchange represents an
additional investment into an existing account, the account receiving the
exchange proceeds must have identical registration, tax identification number,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more. If the account receiving the
exchange proceeds is to be different in any respect, the exchange request must
be in writing and must contain a signature guarantee as described under
"Transaction information -- Redeeming shares -- Signature Guarantee" in the
Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder Fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the phone or in writing. Automatic
Exchanges will continue until the shareholder requests by telephone or in
writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above. An
exchange into another Scudder fund is a redemption of shares, and therefore may
result in tax consequences (gain or loss) to the shareholder and the proceeds of
such exchange may be subject to backup withholding (See "TAXES").
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. The Trusts employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trusts do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trusts will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine. The Trusts and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.
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Redemption by Telephone
In order to request redemptions by telephone, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which the redemption proceeds are to be sent.
The proceeds will not be mailed or wired other than to a predesignated bank
account. Shareholders currently receive the right to redeem up to $100,000 to
their address of record automatically, without having to elect it.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone redemption to
a designated bank account or who want to change the bank account
previously designated to receive redemption payments should either
return a Telephone Redemption Option Form (available upon request)
or send a letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. A signature and a
signature guarantee are required for each person in whose name the
account is registered.
Proceeds will normally be mailed on the next business day or wired on the
next day on which State Street Bank is open for business. Redemption requests
received by the Fund's Transfer Agent after 4 p.m. will receive the net asset
value on the next business day.
If a request for redemption to a shareholder's bank account is made by
telephone or telegram, payment will be made by Federal Reserve bank wire to the
bank account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must
be wired through a commercial bank which is a correspondent of the
savings bank. As this may delay receipt by the shareholder's
account, it is suggested that investors wishing to use a savings
bank discuss wire procedures with their bank and submit any special
wire transfer information with the telephone redemption
authorization. If appropriate wire information is not supplied,
redemption proceeds will be mailed to the designated bank.
The Trusts employ procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Trusts do
not follow such procedures, they may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Trusts will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of 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 to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders that wish to add QuickSell 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 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
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telephone are genuine, and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signatures guaranteed as explained in the
Funds' Prospectus.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
Redemption by Write-A-Check
All new investors and existing shareholders of SLTTFF and SMTTFF who apply
for checks may use them to pay any person, provided that each check is for at
least $100 and not more than $5 million. By using the checks, the shareholder
will receive daily dividend credit on his or her shares until the check has
cleared the banking system. Investors who purchased shares by check may write
checks against those shares only after they have been on each Fund's books for
seven business days. Shareholders who use this service may also use other
redemption procedures. No shareholder may write checks against certificated
shares. The Funds pay the bank charges for this service. However, each Fund will
review the cost of operation periodically and reserves the right to determine if
direct charges to the persons who avail themselves of this service would be
appropriate. The Funds, Scudder Service Corporation and State Street Bank and
Trust Company each reserves the right at any time to suspend or terminate the
"Write-A-Check" procedure.
Checks will be returned by the Custodian if there are insufficient shares
to meet the withdrawal amount. Potential fluctuations in the per share value of
SMTTFF should be considered in determining the amount of the check. An investor
should not attempt to close an account by check, because the exact balance at
the time the check clears will not be known when the check is written.
Other Information
If a shareholder redeems all shares in the account, the shareholder will
receive, in addition to the net asset value thereof, all declared but unpaid
dividends thereon. The value of shares redeemed or repurchased may be more or
less than a shareholder's cost depending upon the net asset value at the time of
the redemption or repurchase. None of the Funds imposes a redemption or
repurchase charge, although a wire charge may be applicable for redemption
proceeds wired to a shareholder's bank account. Redemption of shares, including
redemptions undertaken to effect an exchange for shares of another Scudder fund,
and including exchanges and redemptions with SLTTFF and SMTTFF by Write-A-Check,
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such redemptions may be subject to backup withholding (see "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts should
contact the employer, trustee or custodian of the Plan for the requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefor may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted, (c) during which an emergency
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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
(See "Investment Products and Services" in the Funds' prospectus.)
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 Rules of Fair Practice, a mutual fund
can call itself a "no-load" fund only if the 12b-1 fee and/or service fee does
not exceed 0.25% of a fund's average annual net assets.
Scudder pioneered the no-load concept when it created the nation's first
no-load fund in 1928, and later developed the nation's first family of no-load
mutual funds. The Scudder Family of Funds consists of those Funds or classes of
Funds advised by Scudder which are offered without commissions to purchase or
redeem shares or to exchange from one Fund to another.
The following chart shows the potential long-term advantage of investing
$10,000 in a Scudder Family of Funds pure no-load fund over investing the same
amount in a load fund that collects an 8.50% front-end load, a load fund that
collects only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only
a 0.25% 12b-1 and/or service fee. The hypothetical figures in the chart show the
value of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
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================================================================================
Scudder No-Load Fund
No-Load 8.50% Load Load Fund with with 0.25%
YEARS Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
- --------------------------------------------------------------------------------
10 $25,937 $23,733 $24,222 $25,354
- --------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
================================================================================
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. is
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties on
Prodigy since 1988 and has participated since 1994 in GALT's Networth "financial
marketplace" site on the Internet. The firm made Scudder Funds information
available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders 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.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income, or distributions from realized capital
gains in additional shares of the same Fund. A change of instructions for the
method of payment must be received by the Fund's transfer agent at least 5 days
prior to a dividend record date.
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Shareholders may change their dividend option either by calling 1-800-225-5163
or by sending written instructions to the Transfer Agent. Please include your
account number with your written request.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the transfer agent designating their option for either
reinvestment or cash distributions of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the relevant Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gains distributions automatically deposited to their personal
bank account usually within three business days after a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor. The Centers are designed to provide individuals with services
during any business day. Investors may pick up literature or obtain assistance
with opening an account, adding monies or special options to existing accounts,
making exchanges within the Scudder Family of Funds, redeeming shares or opening
retirement plans. Checks should not be mailed to the Centers but should be
mailed to "The Scudder Funds" at the address listed under "Purchases" or
"Exchanges and Redemptions" in the Funds' prospectus.
Reports to Shareholders
Each Trust issues to their respective shareholders annual and semiannual
financial statements (audited annually by independent accountants), including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights for that Fund, as the case may
be.
Diversification
A shareholder's investment represents an interest in a large, diversified
portfolio of carefully selected securities. Diversification may protect
investors against the possible risks associated with concentrating in fewer
securities.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds and
the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability of
capital and, consistent therewith, to maintain the liquidity of capital
and to provide current income. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.
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<PAGE>
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a high
degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in
foreign currencies and the U.S. dollar. As a secondary objective, the Fund
will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As a
secondary objective, the Fund seeks protection and possible enhancement of
principal value by actively managing currency, bond market and maturity
exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current income
and, secondarily, long-term capital appreciation through investments
primarily in high-yielding debt securities issued by governments and
corporations in emerging markets.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies in
the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund seeks long-term growth of capital through investment in
undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.
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<PAGE>
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.
SCUDDER CHOICE SERIES
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.
GLOBAL GROWTH
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.
Scudder Global Discovery Fund seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity securities
and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital appreciation
through investment primarily in the securities of Latin American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) of
Japanese companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
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<PAGE>
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds may not be available
for purchase or exchange. For more information, please call 1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information," "Purchases" and "Exchanges and Redemptions" in
the Funds' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. 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 who currently own or purchase $10,000 or
more of shares of the Funds may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in each Fund's prospectus. Any such requests must be received by
each 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, each Trust, or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by each Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
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.
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<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 through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of investment program may be suitable for
various investment goals such as, but not limited to, college planning or saving
for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trusts reserve the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS
(See "DISTRIBUTIONS - Dividends and Taxes" in the Funds' prospectus.)
The Funds will follow the practice of distributing substantially all of
their net investment income (defined under "ADDITIONAL INFORMATION -- Glossary")
and any excess of net realized short-term capital gains over net realized
long-term capital losses. In the past, SMTTFF, SMMB and SHYTFF have followed the
practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses. However, if it appears to be
in the best interest of such Funds and the relevant shareholders, such Fund may
retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly on the fourth Boston business day of each month for
the preceding month's net income. Distributions of realized capital gains, if
any, are paid in November or December, although an additional distribution may
be made within three months of the Fund's fiscal year end, if necessary, and
each Fund expects to continue to distribute net capital gains at least annually.
Both types of distributions will be made in shares of that Fund and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent.
PERFORMANCE INFORMATION
(See "FUND SUMMARY - Past Performance" in the Funds' prospectus.)
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
32
<PAGE>
of return of a hypothetical investment, over such periods, according to the
following formula (average annual total return is then expressed as a
percentage):
T = (ERV/P)1/n - 1
Where:
P = A hypothetical initial investment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
Average Annual Total Return for periods ended December 31, 1998
One Five Ten
Year Years Years
Scudder Medium Term Tax Free Fund* 5.58% 5.46% 7.13%
Scudder Managed Municipal Bonds 6.23% 5.88% 8.15%
Scudder High Yield Tax Free Fund** 6.38% 6.35% 8.58%
* 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
7.46%.
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total returns for the one , five and ten year periods would have
been lower.
(1) If the Adviser had not temporarily capped expenses for the period November
1, 1990 through October 31, 1995, the average annual total return of the Fund
for the five year and ten year periods would have been lower.
Average Annual Total Return for period ended October 31, 1998
One Five Ten Life of
Year Years Years Fund(1)
Scudder Limited Term Tax Free Fund* 5.37% -- -- 5.07%
* If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total return would have been lower.
(1) For the period beginning February 15, 1994 (commencement of operations).
Cumulative Total Return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of a Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
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<PAGE>
Cumulative Total Return for periods ended December 31, 1998
One Five Ten
Year Years Years
Scudder Medium Term Tax Free Fund* 5.58% 30.46% 99.18%
Scudder Managed Municipal Bonds 6.23% 33.04% 118.91%
Scudder High Yield Tax Free Fund** 6.38% 36.03% 127.88%
* 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 80.03%.
** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, cumulative total return would have been lower.
Cumulative Total Return for period ended October 31, 1998
One Five Ten Life of
Year Years Years Fund
Scudder Limited Term Tax Free Fund* 5.37% -- -- 26.21%(1)
* If the Adviser had not maintained Fund expenses and had imposed a full
management fee, cumulative total return would have been lower.
(1) For the period beginning February 15, 1994 (commencement of operations).
Total Return is the rate of return on an investment for a specified period
of time calculated in the same manner as Cumulative Total Return.
SEC Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Included in net
investment income is the amortization of market premium or accretion of market
and original issue discount. Yield, sometimes referred to as a Fund's "SEC
yield," is calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[(a-b/cd + 1)6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of expense
maintenance).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
34
<PAGE>
Yields for the 30-day period ended December 31, 1998
Scudder Medium Term Tax Free Fund 3.55%
Scudder Managed Municipal Bonds 3.98%
Scudder High Yield Tax Free Fund 4.20%
Scudder Limited Term Tax Free Fund 3.24%
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 December 31, 1998
TAXABLE EQUIVALENT*
28% 31% 36% 39.6%
FUND Tax Bracket Tax Bracket Tax Bracket Tax Bracket
- ---- ----------- ----------- ----------- -----------
Scudder Medium Term Tax Free Fund 4.93% 5.14% 5.55% 5.88%
Scudder Managed Municipal Bonds 3.98% 5.53% 5.77% 6.22%
Scudder High Yield Tax Free Fund 5.83% 6.09% 6.56% 6.95%
Scudder Limited Term Tax Free Fund 4.50% 4.70% 5.06% 5.36%
* Based on federal income tax rates in effect for the 1998 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 1998
calendar year.
Federal To Equal Hypothetical Tax-Free Yields of
Tax Rates 5%, 7% and 9%, a Taxable Investment Would
1998 Taxable Individual Have To Earn**
Income Brackets Return 5% 7% 9%
- --------------------------------------------------------------------------------
$0 - $24,650 15.0% 5.88% 8.24% 10.59%
$24,651- $59,750 28.0% 6.94% 9.72% 12.50%
$59,751 - $124,650 31.0% 7.25% 10.14% 13.04%
$124,651 - $271,050 36.0% 7.81% 10.94% 14.06%
Over $271,050 39.6% 8.28% 11.59% 14.90%
1998 Taxable Joint
Income Brackets Return 5% 7% 9%
- --------------------------------------------------------------------------------
$0 - $41,200 15.0% 5.88% 8.24% 10.59%
$41,201 - $99,600 28.0% 6.94% 9.72% 12.50%
$99,601 - $151,750 31.0% 7.25% 10.14% 13.04%
$151,751 - $271,050 36.0% 7.81% 10.94% 14.06%
Over $271,050 39.6% 8.28% 11.59% 14.90%
35
<PAGE>
** These illustrations assume the Federal alternative minimum tax is not
applicable, that an individual is not a "head of household" and claims one
exemption and that taxpayers filing a joint return claim two exemptions. Note
also that these federal income tax brackets and rates do not take into account
the effects of (i) a reduction in the deductibility of itemized deductions for
taxpayers whose federal adjusted gross income exceeds $114,700 ($57,350 in the
case of a married individual filing a separate return), or of (ii) the gradual
phaseout of the personal exemption amount for taxpayers whose federal adjusted
gross income exceeds $114,700 (for single individuals) or $172,050 (for married
individuals filing jointly). The effective federal tax rates and equivalent
yields for such taxpayers would be higher than those shown above.
Example:
Based on 1998 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $40,000 would have to earn a
tax-equivalent yield of 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.
* Net amount subject to federal income tax after deductions and exemptions,
exclusive of the alternative minimum tax.
As described above, average annual total return, cumulative total return,
total return, yield, and tax-equivalent yield are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Average annual total return, cumulative total return, total return,
yield, and tax-equivalent yield for a Fund will vary based on changes in market
conditions and the level of a Fund's expenses.
Investors should be aware that the principal of each Fund is not insured.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Examples include, but are not limited to the Dow Jones Industrial Average, the
Consumer Price Index, Standard & Poor's 500 Composite Stock Price Index (S&P
500), the Nasdaq OTC Composite Index, the Nasdaq Industrials Index, the Russell
2000 Index, and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, 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.
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The Funds may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" 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.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Funds, including reprints of, or selections from, editorials or articles about
these Funds. Sources for Fund performance information and articles about the
Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
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CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
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Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Investment Adviser" in the Funds' prospectus.)
Scudder Medium Term Tax Free Fund is a series of Scudder Tax Free Trust, a
Massachusetts business trust established under a Declaration of Trust dated
December 28, 1982, as amended. Scudder Limited Term Tax Free Fund is the other
series of the Trust. The name and investment objectives of SMTTFF were changed
effective November 1, 1990. Scudder Municipal Trust is a Massachusetts business
trust established under a Declaration of Trust dated September 24, 1976, as
amended. The Trustees of Scudder Municipal Trust have established and designated
two series of the Trust: Scudder Managed Municipal Bonds and Scudder High Yield
Tax Free Fund. Each Fund's authorized capital consists of an unlimited number of
shares of beneficial interest, $.01 par value. All shares of each Fund issued
and outstanding will be fully paid and non-assessable by the Funds, and
redeemable as described in this Statement of Additional Information.
All shares of STFT are of one class and have equal rights as to voting,
dividends and liquidation. The Trustees of STFT have the authority to issue two
or more series of shares and to designate the relative rights and preferences as
between the different series. If more than one series of shares were issued and
a series were unable to meet its obligations, the remaining series might have to
assume the unsatisfied obligations of that series. All shares issued and
outstanding will be fully paid and non-assessable by the Funds and redeemable as
described in this Statement of Additional Information and in the Funds'
prospectus.
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, 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.
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Although shareholders of different classes of a series would have an interest in
the same portfolio of assets, shareholders of different classes may bear
different expenses in connection with different methods of distribution. The
Trustees have no present intention of taking the action necessary to effect the
division of shares into separate classes (which under present regulations would
require the Funds first to obtain an exemptive order of the SEC), nor of
changing the method of distribution of shares of the Funds.
Currently, the assets of SMT and STFT received for the issue or sale of
the shares of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such series and constitute the underlying assets of such series. The underlying
assets of each series are segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a share of the
general liabilities of SMT. If a series were unable to meet its obligations, the
assets of all other series may in some circumstances be available to creditors
for that purpose, in which case the assets of such other series could be used to
meet liabilities which are not otherwise properly chargeable to them. Expenses
with respect to any two or more series are to be allocated in proportion to the
asset value of the respective series except where allocations of direct expenses
can otherwise be fairly made. The officers of SMT and STFT, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given series, or which are general or allocable
to two or more series. In the event of the dissolution or liquidation of SMT and
STFT, the holders of the shares of any series are entitled to receive as a class
the underlying assets of such shares available for distribution to shareholders.
Shares of SMT and STFT entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
Each Fund's Declaration of Trust provides that obligations of the Fund
involved are not binding upon the Trustees individually but only upon the
property of that Fund, that the Trustees and officers will not be liable for
errors of judgment or mistakes of fact or law, and that the Fund involved will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Fund except if it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interests of the Fund involved.
However, nothing in the Declarations of Trust protect or indemnify a Trustee or
officer against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
INVESTMENT ADVISER
(See "Investment Adviser" in the Funds' prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U.S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, the Adviser's predecessor entered into an agreement with
Zurich Insurance Company ("Zurich") pursuant to which the predecessor and Zurich
agreed to form an alliance. On December 31, 1997, Zurich acquired a majority
interest in Scudder, and Zurich made its subsidiary Zurich Kemper Investments,
Inc., a part of the predecessor organization. The predecessor's name has been
changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
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The principal source of the Adviser's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today, it provides investment counsel
for many individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Scudder Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds,
Inc., Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder
Pathway Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil
Fund, Inc., Scudder Spain and Portugal Fund, Inc., Scudder Global High Income
Fund, Inc., The Korea Fund, Inc. and The Japan Fund, Inc. Some of the foregoing
companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual funds
which comprise the AARP Investment Program from Scudder. The AARP Investment
Program from Scudder has assets over $12 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.
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.
The Adviser maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. The Adviser receives published reports and
statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. In selecting the securities in which
the Funds may invest, the conclusions and investment decisions of the Adviser
with respect to the Funds are based primarily on the analyses of its own
research department.
Certain investments may be appropriate for more than one of the Funds (or
more than one series of SMT and STFT) and also for other clients advised by the
Adviser, in particular the other Scudder tax free funds. Investment decisions
for the Funds and other clients are made with a view to achieving their
respective investment objectives and after consideration of such factors as
their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the Adviser to be equitable
to each. In some cases, this procedure could have an adverse effect on the price
or amount of the securities purchased or sold by a Fund. Purchase and sale
orders for a Fund may be combined with those of other clients of the Adviser in
the interest of achieving the most favorable net results to the Funds.
The transaction between Scudder and Zurich resulted in the assignment of
each Funds' investment management agreement with Scudder, the agreements were
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, new investment management agreements
between the Funds and the Adviser were approved by the Funds' Trustees. At the
special meeting of the Funds' shareholders held on October 24, 1997, the
shareholders also approved proposed new investment management agreements. The
new investment management agreements (the "1997 Agreements") became effective as
of December 31, 1997 and were in effect for an initial term ending on September
30, 1998. The Agreements are in all material respects on the same terms as the
previous investment management agreements which they supersede. The Agreements
incorporate conforming changes which promote consistency among all of the funds
advised by the Adviser and which permit ease of administration.
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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.
Upon consummation of this transaction, the Funds' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved new investment management
agreements (the "Agreements") with Scudder Kemper, which are substantially
identical to the current 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 in December 1998.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 6, 1998. The Agreements will continue in effect until September 30, 1999
and 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 Trust's 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.
For the above services, SLTTFF pays the Adviser an annual rate of 0.60% of
the average daily net assets of the Fund. The Adviser agreed to maintain the
annualized expenses at 0.75% of average daily net assets until July 31, 1999.
The Agreement provides that if the Fund's expenses, exclusive of taxes, interest
and extraordinary expenses exceed specific limits, such excess, up to the amount
of the management fee, will be paid by the Adviser. The Adviser retains the
ability to be repaid by the Fund if expenses fall below the specified limit
prior to the end of the fiscal year. These expense limitation arrangements can
decrease the Fund's expenses and improve its performance. For the fiscal year
ended October 31, 1996, the Adviser did not impose a portion of its fee
amounting to $230,799 and the fee imposed aggregated $500,912, all of which was
unpaid at October 31, 1996. For the year ended October 31, 1997, the Adviser did
not impose a portion of its fee amounting to $93,434 and the fee imposed
aggregated $629,013, of which
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$58,676 was unpaid at October 31, 1997. For the year ended October 31, 1998, the
Adviser did not impose a portion of its fee amounting to $707,892 and the fee
imposed aggregated $89,875.
The Adviser has agreed to contractually maintain the annualized expenses
of SLTTFF at 0.75% of average daily net assets until July 31, 1999.
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.
For the years ended December 31, 1996, 1997 and 1998, SMTTFF's fees
pursuant to such Agreement amounted to $3,879,293, $3,710,976 and $3,867,414,
respectively.
For the above services SMMB pays 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, 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, 1996, 1997 and 1998, aggregate fees
incurred by SMMB pursuant to its investment advisory agreement amounted to
$3,826,131, $3,705,253 and $3,760,257, respectively.
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 such net assets
in excess of $300 million, payable monthly, provided the Fund will make such
interim payments as may be requested by the Adviser not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid.
The Adviser agreed not to impose all or a portion of its investment
advisory fee with respect to SHYTFF in order to maintain the annualized expenses
of the Fund at not more than 0.80% of average daily net assets of the Fund until
April 30, 1996. For the years ended December 31, 1996, 1997 and 1998, fees
incurred by SHYTFF amounted to $1,885,083, $2,050,368 and $2,440,931,
respectively. For the year ended December 31, 1996, the Adviser did not impose a
fee which would have amounted to $121,432.
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 ratio for SLTTFF for the years ended October 31, 1996, 1997 and
1998 were 0.63%, 0.75% and 0.75%, respectively. 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 expense ratios of SMMB for the years ended December 31,
1996, 1997 and 1998 were 0.63%, 0.64% and 0.62%, 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. 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 such 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."
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The Agreements identify the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens & Clark, Inc." (together, the "Scudder Marks"). Under
this license, each Trust, with respect to a Fund, has the non-exclusive right to
use and sublicense the Scudder name and marks as part of its name, and to use
the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreements and in discussions with Scudder
Kemper Investments, Inc. concerning the Agreements, Trustees who are not
"interested persons" of the Adviser are represented by independent counsel at
each Fund's expense.
The Agreements provide that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by one of the Funds in
connection with matters to which the Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.
None of the Trustees or Officers of a Fund may have dealings with that
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
Position with
Underwriter,
Position with Principal Scudder Investor
Name, Age and Address Trust Occupation** Services, Inc.
- --------------------- ------------- ------------ ----------------
Daniel Pierce*+ President and Managing Director Vice President,
(64) Trustee of Scudder Kemper Director and
Investments, Inc. Assistant
Treasurer
Henry P. Becton, Jr. Trustee President and --
(55) General Manager,
WGBH WGBH Educational
125 Western Avenue Foundation
Allston, MA 02134
Dawn-Marie Driscoll Trustee Executive Fellow, --
(52) Center for Business
Driscoll Associates Ethics, Bentley
4909 SW 9th Place College; President,
Cape Coral, FL 33914 Driscoll Associates
(consulting firm)
44
<PAGE>
Position with
Underwriter,
Position with Principal Scudder Investor
Name, Age and Address Trust Occupation** Services, Inc.
- --------------------- ------------- ------------ ----------------
Peter B. Freeman (66) Trustee Trustee, Eastern --
100 Alumni Avenue Utilities
Providence, RI 02906 Associates;
Director, Swan
Point Cemetery;
Director, AMICA
Mutual Insurance
Co.; Trustee,
various
non-family trusts
and charitable
institutions;
Director, the
A.H. Belo Company
George M. Lovejoy, Trustee President and --
Jr. (68) Director, Fifty
50 Congress Street Associates (real
Suite 543 estate investment
Boston, MA 02109-4002 trust)
Wesley W. Marple, Jr. Trustee Professor of --
(67) Business
Northeastern University Administration,
413 Hayden Hall Northeastern
360 Huntington Avenue University, College
Boston, MA 02115 of Business
Administration
Kathryn L. Quirk*# Trustee, Vice Managing Director Senior Vice
(46) President and of Scudder Kemper President,
Assistant Investments, Inc. Director and
Secretary Clerk
Jean C. Tempel (55) Trustee Venture Partner, --
Internet Capital Corp. Internet Capital
10 Post Office Square Corp.
Suite 1325
Boston, MA 02109-4603
Philip G. Condon+ (48) Vice Managing Director Senior Vice
President (1) of Scudder Kemper President and
Investments, Inc. Director
Thomas W. Joseph+ Vice President Senior Vice Vice President,
(59) President of Director,
Scudder Kemper Treasurer and
Investments, Inc. Assistant Clerk
Ashton P. Goodfield+ Vice Senior Vice --
(35) President (2) President of Scudder
Kemper Investments,
Inc.
Ann M. McCreary#(42) Vice President Managing Director --
of Scudder Kemper
Investments, Inc.
Thomas F. McDonough+ Vice President, Senior Vice Assistant Clerk
(52) Treasurer, and President of Scudder
Secretary Kemper Investments,
Inc.
45
<PAGE>
Position with
Underwriter,
Position with Principal Scudder Investor
Name, Age and Address Trust Occupation** Services, Inc.
- --------------------- ------------- ------------ ----------------
John R. Hebble+ Treasurer Senior Vice --
(40) President of Scudder
Kemper Investments,
Inc.
Caroline Pearson+ Assistant Senior Vice --
(36) Secretary President, Scudder
Kemper Investments,
Inc.; Associate,
Dechert Price &
Rhoads (law firm),
1989-1997
(1) SMT
(2) STFT
* Mr. Pierce and Ms. Quirk are considered by the Funds and their counsel to
be Trustees who are "interested persons" of the Adviser or of the 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.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
Ms. Tempel, Ms. Quirk and Mr. Freeman are members of the Executive
Committee of STFT; Messrs. Lovejoy, Marple and Pierce are members of the
Executive Committee of SMT. Each Committee has the power to declare dividends
from ordinary income and distributions of realized capital gains to the same
extent as its Board is so empowered.
As of January 31, 1999, all Trustees and officers of STFT as a group owned
beneficially (as that term is defined in Section 13(d) under the Exchange Act)
less than 1% of SMTTFF.
Certain accounts for which the Adviser acts as investment adviser owned
__________ shares in the aggregate, or _____% of the outstanding shares of
SMTTFF on January 31, 1999. The Adviser may be deemed to be the beneficial owner
of such shares but disclaims any beneficial ownership in such shares.
As of January 31, 1999, _________ shares in the aggregate, ____% of the
outstanding shares of SMTTFF, were held in the name of Charles Schwab & Co., 101
Montgomery Street, San Francisco, CA 94104, who may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the knowledge of STFT, as of January 31, 1999, no person owned
beneficially more than 5% of SMTTFF's outstanding shares, except as stated
above.
As of January 31, 1999, all Trustees and officers of STFT as a group owned
beneficially (as the term is defined in Section 13(d) under the Exchange Act)
less than 1% of SLTTFF.
Certain accounts for which the Adviser acts as investment adviser owned
_________ shares in the aggregate or ____% of the outstanding shares of SLTTFF
on January 31, 1999. The Adviser may be deemed to be the beneficial owner of
such shares but disclaims any beneficial ownership in such shares.
As of January 31, 1999, _______ shares in the aggregate, or ____% of the
outstanding shares of SLTTFF, were held in the name of Q.A. Shaw McDean Jr.,
P.O. Box 313 70 West River Road, Rumson, NJ 07760.
As of January 31, 1999, all Trustees and officers of SMT as a group owned
beneficially (as that term is defined under Section 13(d) of the Exchange Act)
less than 1% of the shares of SMMB.
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<PAGE>
Certain accounts for which the Adviser acts as investment adviser owned
__________ shares in the aggregate, or _____% of the outstanding shares of SMMB
on January 31, 1999. The Adviser may be deemed to be the beneficial owner of
such shares but disclaims any beneficial interest in such shares.
As of January 31, 1999, _________ shares in the aggregate, ____% of the
outstanding shares of SMMB, were held in the nominees of Fiduciary Trust
Company. Fiduciary Trust Company may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
To the knowledge of SMT, as of January 31, 1999, no person owned
beneficially more than 5% of SMMB's outstanding shares except as stated above.
As of January 31, 1999, all Trustees and Officers of SMT as a group owned
beneficially (as that term is defined under Section 13(d) of the Exchange Act)
less than 1% of the shares of SHYTFF.
As of January 31, 1999, _________ shares in the aggregate, ____% 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 certain of these shares but disclaims any beneficial
ownership therein.
To the knowledge of SMT, as of January 31, 1999, 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.
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
The Independent Trustees receive the following compensation from each
Fund: an annual trustee's fee of $4,800; a fee of $150 for attendance at each
board meeting, audit committee meeting, or other meeting held for the purposes
of considering arrangements between the Trust on behalf of each Fund and the
Adviser or any affiliate of the Adviser; $75 for all other committee meetings
and reimbursement of expenses incurred for travel to and from Board Meetings. No
additional compensation is paid to any Independent Trustee for travel time to
meetings, attendance at trustees' 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. The
Independent Trustee who serves as lead or liason Trustee receives an additional
annual retainer fee of $500 from each Fund. Independent Trustees do not receive
any employee benefits such as pension or retirement benefits or health
insurance. Notwithstanding the schedule
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<PAGE>
of fees, the Independent Trustees have in the past and may in the future waive a
portion of their compensation. or other activities.
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 1998 from the Trust and from all of Scudder funds as a group.
Paid by the Trusts
------------------
Scudder Paid
Municipal Scudder Tax by the
Name Trust* Free Trust** Funds
---- ------ ------------ -----
Henry P. Becton, Jr.,
Trustee $12,046.42 $12,046.42 $135,000 (28 funds)
Dawn-Marie Driscoll,
Trustee $12,899.96 $12,899.96 $145,000 (28 funds)
Peter B. Freeman,
Trustee $12,143.64 $12,143.64 $172,425 (46 funds)
George M. Lovejoy, Jr.,
Trustee $12,046.42 $12,046.42 $148,600 (29 funds)
Wesley W. Marple, Jr.,
Trustee $12,046.42 $12,046.21 $135,000 (28 funds)
Jean C. Tempel,
Trustee $12,067.86 $12,067.86 $135,000 (29 funds)
* Scudder Municipal Trust consists of two Funds: Scudder Managed Municipal
Bonds and Scudder High Yield Tax Free Fund
** Scudder Tax Free Trust consists of two Funds: Scudder Medium Term Tax Free
Fund and Scudder Limited Term Tax Free Fund
No fees were incurred by the Funds with respect to the alliance with
B.A.T.
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 SLTTFF, SMTTFF, SMMB and SHYTFF each
dated September 7, 1998 will remain in effect until September 30, 1999 and from
year to year thereafter only if its continuance is approved annually by a
majority of the Trustees who are not parties to such agreement or "interested
persons" of any such party and by a vote either of a majority of the Trustees or
a majority of the outstanding voting securities of the relevant Fund. The
underwriting agreement of each Fund was last approved by the Trustees on August
10, 1998.
Under the underwriting agreements, each Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering a Fund as a broker/dealer in various
states, as required; the fees and expenses of preparing, printing and mailing
prospectuses annually to existing shareholders (see below for expenses relating
to prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications to shareholders of that Fund; the cost of printing and
mailing confirmations of purchases of shares and any prospectuses accompanying
such confirmations; any issuance taxes and/or any initial transfer taxes; a
portion of shareholder toll-free telephone charges and expenses of shareholder
service
48
<PAGE>
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
(See "DISTRIBUTIONS - Dividends and Taxes" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in the Statement of Additional Information
in light of their particular tax situation.
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and has qualified as such. Each of the Funds intends to continue to so qualify,
in each taxable year as required under the Code in order to avoid payment of
federal income tax at the Fund level.
In order to qualify as a regulated investment company, each Fund must meet
certain requirements regarding the source of its income and the diversification
of its assets.
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.
Each of the Funds is subject to a 4% nondeductible excise tax on amounts
of taxable income required to be but not distributed under a prescribed formula.
The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of such Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year as well as amounts that were neither distributed nor taxed to the Fund
during the prior calendar year. (Investment companies with taxable years ending
on November 30 or December 31 may make an irrevocable election to measure the
required capital gain distribution using their actual taxable year.) Although
the Funds' distribution policies should enable them to avoid excise tax
liability, each Fund may retain (and be subject to income or excise tax on) a
portion of its capital gain or other income if it appears to be in the best
interest of such Fund and its shareholders.
Net investment income is made up of dividends and interest, less expenses.
Net realized capital gains for a fiscal year are computed by taking into account
any capital loss carryforward or post-October loss of a Fund. SLTTFF, SHYTFF and
SMMB intend to offset realized capital gains by using their capital loss
carryforwards before distributing any capital gains. In addition, SHYTFF and
SMMB intend to offset realized capital gains by using their post-October
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<PAGE>
losses before distributing any capital gains. As of December 31, 1998, SHYTFF
had a net tax basis capital loss carryforward of approximately $4,340,000, which
may be applied against any realized net taxable capital gains of each succeeding
year until fully utilized or until December 31, 2004, the expiration date,
whichever occurs first.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by STFT, SMMB or SHYTFF for reinvestment,
requiring federal income taxes to be paid thereon, the Fund involved will elect
to treat such capital gains as having been distributed to its shareholders. As a
result, shareholders will report such capital gains as long-term capital gains
will be able to claim 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 the shareholder's pro rata
share of such 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.
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.
Properly designated distributions of the excess of net long-term capital
gain over net short-term capital loss are taxable at a maximum 20% or 28%
capital gains rate (depending on a Fund's holding period for the assets giving
rise to the gain) to shareholders as long-term capital gain, regardless of the
length of time the shares of the Fund involved have been held by such
shareholders. Such distributions are not eligible for the dividends-received
deduction to corporate shareholders of the Funds. Any loss realized upon the
redemption of shares of STFT, SMMB or SHYTFF within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain with respect to such
shares. Any short-term capital loss realized upon the redemption of shares of
STFT, SMMB or SHYTFF within six months from the date of their purchase will be
disallowed to the extent of any tax-exempt dividends received with respect to
such shares. Any loss realized on the redemption of shares of one of such Funds
may be disallowed if shares of the same Fund are purchased (including shares
purchased under the dividend investment plan or the automatic reinvestment plan)
within 30 days before or after such redemption.
Distributions derived from interest which is exempt from regular federal
income tax may subject corporate shareholders to or increase their liability
under the 20% alternative minimum tax. A portion of such distributions may
constitute a tax preference item for individual shareholders and may subject
them to or increase their liability under the 26% and 28% alternative minimum
tax.
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
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<PAGE>
have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the federal income tax status of all distributions,
including a statement of the percentage of the prior calendar year's
distributions which were designated as tax-exempt, the percentage of such
tax-exempt distributions treated as a tax-preference item for purposes of the
alternative minimum tax, and the source of such distributions on a
state-by-state basis. All distributions of taxable or tax-exempt net investment
income and net realized capital gain, whether received in shares or in cash,
must be reported by each shareholder on his or her federal income tax return.
Dividends and distributions declared in October, November or December to
shareholders as of a record date in such a month will be deemed to have been
received by shareholders in December if paid during January of the following
year. Redemption's 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 entered into by STFT, SMMB or SHYTFF, and all
options on futures contracts written or purchased by them will be governed by
Section 1256 of the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such position
generally will be treated as 60% long-term and 40% short-term capital gain or
loss, and on the last trading day of the fiscal year, all outstanding Section
1256 positions will be marked to market (i.e. treated as if such positions were
closed out at their closing price on such day), with any resulting gain or loss
recognized as 60% long-term and 40% short-term capital gain or loss.
Positions of STFT, SMMB or SHYTFF, which consist of at least one debt
security not governed by Section 1256 and at least one futures contract or
option on a futures contract governed by Section 1256 which substantially
diminishes the risk of loss with respect to such debt security, will be treated
as a "mixed straddle." Although mixed straddles are subject to the straddle
rules of Section 1092 of the Code, the operation of which may cause deferral of
losses, adjustments in the holding periods of securities and conversion of
short-term capital losses into long-term capital losses, certain tax elections
exist for them which reduce or eliminate the operation of these rules. SMTTFF,
SMMB and SHYTFF will monitor their transactions in options and futures and may
make certain tax elections in order to mitigate the operation of these rules and
prevent their disqualification as regulated investment companies for federal
income tax purposes.
Under the federal income tax law, each Fund will be required to report to
the Internal Revenue Service all distributions of taxable income and capital
gains and, in the case of SLTTFF, SMTTFF, SMMB and SHYTFF, gross proceeds from
the redemption or exchange of shares, except in the case of certain exempt
shareholders. Under the "backup withholding" tax provisions of Section 3406 of
the Code, distributions of taxable income and capital gains and proceeds from
the redemption or exchange of shares are generally subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish a regulated investment company with their taxpayer
identification numbers and with their required certifications regarding their
status under the federal income tax law. Under a special exception,
distributions of taxable income and capital gains of each Fund will not be
subject to backup withholding if each reasonably estimates that at least 95% of
all such distributions will consist of tax-exempt interest dividends. However,
the proceeds from the redemption or exchange of shares of SLTTFF, SMTTFF, SMMB
and SHYTFF may be subject to backup withholding. If the withholding provisions
are applicable, any such distributions and proceeds, whether distributed in cash
or reinvested in additional shares, will be reduced by the amounts required to
be withheld.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of each Fund will not be deductible for federal income tax purposes.
Under rules used by the Internal Revenue Service to determine when borrowed
funds are used for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the purchase of shares.
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<PAGE>
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 redemption's 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.
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 reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
For SLTTFF, SMTTFF, SMMB and SHYTFF, 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 research, market and statistical information to a
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
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performance of accounts. The Adviser is authorized when placing portfolio
transactions for a Fund to pay a brokerage commission in excess of that which
another broker might charge for executing the same transaction on account of
execution services and the receipt of research, market or statistical
information. 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 the Funds 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, market and statistical information from
broker/dealers may be useful to a Fund 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 a Fund, and not all such information is used by
the Adviser in connection with a Fund. 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 a
Fund.
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,
1996, 1997 and 1998 were 14.1%, 13.4% and 10.75%, respectively. The portfolio
turnover rates of SLTTFF for the fiscal years ended October 31, 1996, 1997 and
1998 were 37.1%, 17.8% and 23.2%, respectively. The portfolio turnover rates of
SMMB for the years ended December 31, 1996, 1997 and 1998 were 12.2%, 9.8% and
8.6%, respectively. The portfolio turnover rates of SHYTFF for the years ended
December 31, 1996, 1997 and 1998 were 21.9%, 33.2% and 14.32%, respectively.
NET ASSET VALUE
The net asset value of shares of SLTTFF, SMTTFF, SMMB and SHYTFF are
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading (the "Value Time"). The Exchange is scheduled to be
closed on the following holidays: New Year's Day, Dr. Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of a Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price. Lacking any sales, the security is valued
at the calculated mean between the most recent bid quotation and the most recent
asked quotation (the "Calculated Mean"). If there are no bid and asked
quotations, the security is valued at the most recent bid quotation. An unlisted
equity security which is traded on The NASDAQ Stock Market ("NASDAQ") is valued
at the most recent sale price. If there are no such sales, the security is
valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ system, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturates of sixty days or less shall be valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
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Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of the funds' other
portfolio holdings is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of each Fund included in each 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 accountants, 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
each 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.
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
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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.
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
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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
1. Bond
A contract by an issuer (borrower) to repay the owner of the
contract (lender) the face amount of the bond on a specified date
(maturity date) and to pay a stated rate of interest until maturity.
Interest is generally paid semiannually in amounts equal to one half
the annual interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
(a) Market Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market
discount (premium) is the difference between market price and face
value.
(b) Original Issue Discount
An original issue discount is the discount from face value at which
the bond is first offered to the public.
4. Face Value
The value of a bond that appears on the face of the bond, unless the
value is otherwise specified by the issuing company. Face value is
ordinarily the amount the issuing company promises to pay at
maturity. Face value is not an indication of market value.
5. Liquidation
The process of converting securities or other property into cash.
6. Maturity
The date on which the principal amount of a debt obligation comes
due by the terms of the instrument.
7. Municipal Security
Securities issued by or on behalf of states, territories and
possessions of the United States, their political subdivisions,
agencies and instrumentalities and the District of Columbia and
other issuers,
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the interest from which is, at the time of issuance in the opinion
of bond counsel for the issuers, exempt from federal income tax,
except for the applicability of the alternative minimum tax.
8. Net Asset Value Per Share
The value of each share of each Fund for purposes of sales and
redemptions.
9. Net Investment Income
The net investment income of a Fund is comprised of its interest
income, including accretion of original issue discounts, less
amortization of premiums and expenses paid or accrued computed under
Generally Accepted Accounting Principles (GAAP).
10. Par Value
Par value of a bond is a dollar amount representing the denomination
and assigned value of the bond. It signifies the dollar value on
which interest on the bonds is computed and is usually the same as
face value and maturity value for an individual bond. For example,
most bonds are issued in $1,000 denominations and they have a face
value, maturity value and par value of $1,000. Their market price
can of course vary significantly from $1,000 during their life
between issuance and maturity.
11. Series
SMT is composed of two series: SMMB and SHYTFF. Each Series is
distinct from the other, although both SMMB and SHYTFF are combined
in one investment company -- SMT.
STFT is composed of two series: SMTTFF and SLTTFF. Each series is
distinct from the other, although both SMTTFF and SLTTFF are
combined in one investment company -- STFT.
Other Information
The CUSIP number for SLTTFF is 81123Q104.
The CUSIP number for SMTTFF is 811236-20-7.
The CUSIP number for SMMB is 811170-10-9.
The CUSIP number for SHYTFF is 811170-20-8.
SMTTFF, SMMB and SHYTFF have a taxable year ending on December 31, SLTTFF
has a taxable year ending October 31.
Portfolio securities of each Fund and each series of SMT are held
separately, pursuant to a custodian agreement, by the Funds' custodian, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02101.
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. SLTTFF, SMTTFF, SMMB and SHYTFF pay SFAC an annual fee
equal to 0.024% of the first $150 million of average daily net assets, 0.0070%
of such assets in
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excess of $150 million, 0.0040% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. The fee incurred by SLTTFF to
SFAC for the fiscal year ended October 31, 1996 amounted to $39,722. The fee
incurred by SLTTFF to SFAC for the fiscal year ended October 31, 1997 amounted
to $38,322, of which $6,212 was unpaid at October 31, 1997. The fee incurred by
SLTTFF to SFAC for the fiscal year ended October 31, 1998 amounted to $40,937,
of which $6,584 was unpaid at October 31, 1998. For the year ended December 31,
1996, the amounts charged to SMTTFF, SMMB and SHYTFF by SFAC 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 were $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.
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. The
Funds pay Service Corporation an annual fee for each account maintained for a
participant. 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 a Fund's shares whose interests
are held in an omnibus account. A total of $329,743 was charged by Service
Corporation to SMMB for the calendar year ended December 31, 1996. A total of
$292,138 was charged to SHYTFF for the year ended December 31, 1996. $406,238
was charged to SMTTFF for the year ended December 31, 1996. For SLTTFF for the
year ended October 31, 1996, Service Corporation imposed an aggregated fee of
$44,784. A total of $329,430 was charged by Service Corporation to SMMB for the
calendar year ended December 31, 1997. A total of $287,904 was charged to SHYTFF
for the year ended December 31, 1997, of which $23,216 was unpaid at December
31, 1997. $382,526 was charged to SMTTFF for the year ended December 31, 1997,
of which $29,515 was unpaid at December 31, 1997. For SLTTFF for the year ended
October 31, 1997, Service Corporation imposed an aggregated fee of $46,003, of
which $3,813 was unpaid at October 31, 1997. A total of $316,492 was charged by
Service Corporation to SMMB for the calendar year ended December 31, 1998, of
which $26,419 was unpaid at December 31, 1998. A total of $312,600 was charged
to SHYTFF for the year ended December 31, 1998, of which $27,983 was unpaid at
December 31, 1998. $347,239 was charged to SMTTFF for the year ended December
31, 1998, of which $30,267 was unpaid at December 31, 1998. For SLTTFF for the
year ended October 31, 1998, Service Corporation imposed an aggregated fee of
$40,937, of which $6,584 was unpaid at October 31, 1998.
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. Each Fund pays Scudder Trust Company an annual fee of $17.55 per
shareholder account.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which each Trust has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statements and their amendments for
further information with respect to the Funds and the securities offered hereby.
The Registration Statements and their amendments are available for inspection by
the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder Limited Term Tax Free Fund
The financial statements, including the investment portfolio of Scudder
Limited Term Tax Free Fund together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated October 31, 1998 and are hereby deemed to be part of this Statement
of Additional Information.
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Scudder Medium Term Tax Free Fund
The financial statements, including the investment portfolio, of Scudder
Medium Term Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1998 and are hereby deemed to be part of this Statement
of Additional Information.
Scudder Managed Municipal Bonds
The financial statements, including the investment portfolio, of Scudder
Managed Municipal Bonds, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1998 and are hereby deemed to be part of this Statement
of Additional Information.
Scudder High Yield Tax Free Fund
The financial statements, including the investment portfolio, of Scudder
High Yield Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference and attached hereto in the Annual Report to the Shareholders of the
Fund dated December 31, 1998 and are hereby deemed to be part of this Statement
of Additional Information.
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SCUDDER TAX FREE TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
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<S> <C> <C>
(a) (1) Amended and Restated Declaration of Trust dated December 8, 1987.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(2) Amendment dated May 1, 1992 to the Amended and Restated Declaration of Trust
dated December 8, 1987.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(3) Establishment and Designation of Additional Series of shares dated April 1,
1985.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(4) Redesignation of Series dated October 9, 1990.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(b) (1) By-laws dated December 28, 1982.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(2) Amendment dated August 13, 1991 to the By-laws of the Registrant.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(3) Amendment dated December 10, 1991 to the By-laws of the Registrant.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant, on behalf of Scudder
Limited Term Tax Free Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 30 to the
Registration Statement.)
(2) Investment Management Agreement between the Registrant, on behalf of Scudder
Medium Term Tax Free Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 30 to the
Registration Statement.)
(e) (1) Underwriting Agreement between the Registrant and Scudder Investor Services,
Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 30 to the
Registration Statement.)
(f) Inapplicable.
Part C - Page 1
<PAGE>
(g) (1) Custodian Contract with State Street Bank and Trust Company ("State Street
Bank") dated April 12, 1983.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(2) Amendment to the Custodian Agreement between the Registrant and State Street
Bank dated August 9, 1988.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(3) Amendment to the Custodian Agreement between the Registrant and State Street
Bank dated December 11, 1990.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(4) Fee schedule for Exhibit (g)(1).
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(5) Subcustodian Agreement between State Street Bank and Morgan Guaranty Trust
Company of New York dated November 25, 1985.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(6) Subcustodian Agreement between Irving Trust Company and State Street Bank
dated November 30, 1987.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(7) Subcustodian Agreement between Chemical Bank and State Street Bank dated May
31, 1988.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(8) Subcustodian Agreement between Security Pacific Bank and Trust Company (New
York) and State Street Bank dated February 18, 1988.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(9) Subcustodian Agreement between Bankers Trust Company and State Street Bank
dated August 15, 1989, filed May 1, 1990.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(h) (1) Transfer Agency and Service Agreement between the Registrant and Scudder
Service Corporation dated October 2, 1989.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(2) Fee schedule for Exhibit (h)(1).
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
Part C - Page 2
<PAGE>
(3) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Limited Term Tax Free Fund, and Scudder Fund Accounting Corporation
dated February 15, 1994.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(4) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Medium Term Tax Free Fund, and Scudder Fund Accounting Corporation
dated February 21, 1995.
(Incorporated by reference to Post-Effective Amendment No. 21 to the
Registration Statement.)
(i) Inapplicable.
(j) Consent of Independent Accountants filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Financial Data Schedules filed herein.
(o) Inapplicable.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
CORPORATION
-----------
Item 25. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its affiliates including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
directors 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 Tenth of Registrant's Articles of Incorporation state
as follows:
TENTH: Liability and Indemnification
------ -----------------------------
To the fullest extent permitted by the Maryland
General Corporation Law and the Investment Company Act of
1940, no director or officer of the Corporation shall be
liable to the Corporation or to its stockholders for damages.
The limitation on liability applies to events occurring at the
time a person serves as a director or officer of the
Corporation, whether or not such person is a director or
officer at the time of any proceeding in which liability is
asserted. No amendment to these Articles of Amendment and
Restatement or repeal of any of its provisions shall limit or
eliminate the benefits provided to directors and officers
under this provision with respect to any act or omission which
occurred prior to such amendment or repeal.
The Corporation, including its successors and
assigns, shall indemnify its directors and officers and make
advance payment of related expenses to the fullest extent
permitted, and in
Part C - Page 3
<PAGE>
accordance with the procedures required by Maryland law,
including Section 2-418 of the Maryland General Corporation
law, as may be amended from time to time, and the Investment
Company Act of 1940. The By-Laws may provide that the
Corporation shall indemnify its employees and/or agents in any
manner and within such limits as permitted by applicable law.
Such indemnification shall be in addition to any other right
or claim to which any director, officer, employee or agent may
otherwise be entitled.
The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or
other enterprise or employee benefit plan against any
liability asserted against and incurred by such person in any
such capacity or arising out of such person's position,
whether or not the Corporation would have had the power to
indemnify against such liability.
The rights provided to any person by this Article
shall be enforceable against the Corporation by such person
who shall be presumed to have relied upon such rights in
serving or continuing to serve in the capacities indicated
herein. No amendment of these Articles of Amendment and
Restatement shall impair the rights of any person arising at
any time with respect to events occurring prior to such
amendment.
Nothing in these Articles of Amendment and
Restatement shall be deemed to (i) require a waiver of
compliance with any provision of the Securities Act of 1933,
as amended, or the Investment Company Act of 1940, as amended,
or of any valid rule, regulation or order of the Securities
and Exchange Commission under those Acts or (ii) protect any
director or officer of the Corporation against any liability
to the Corporation or its stockholders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of his or her
duties or by reason of his or her reckless disregard of his or
her obligations and duties hereunder.
Article V of Registrant's Amended and Restated By-Laws states
as follows:
ARTICLE V
---------
INDEMNIFICATION AND INSURANCE
-----------------------------
SECTION 1. Indemnification of Directors and Officers. Any person who
was or is a party or is threatened to be made a party in any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is a current or former
Director or officer of the Corporation, or is or was serving while a Director or
officer of the Corporation at the request of the Corporation as a Director,
officer, partner, trustee, employee, agent or fiduciary or another corporation,
partnership, joint venture, trust, enterprise or employee benefit plan, shall be
indemnified by the Corporation against judgments, penalties, fines, excise
taxes, settlements and reasonable expenses (including attorneys' fees) actually
incurred by such person in connection with such action, suit or proceeding to
the fullest extent permissible under the Maryland General Corporation Law, the
Securities Act of 1933 and the 1940 Act, as such statutes are now or hereafter
in force, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct").
SECTION 2. Advances. Any current or former Director or officer of the
Corporation claiming indemnification within the scope of this Article V shall be
entitled to advances from the Corporation for payment of the reasonable expenses
incurred by him in connection with proceedings to which he is a party in the
manner and to the fullest extent permissible under the Maryland General
Corporation Law, the Securities Act of 1933 and the 1940 Act, as such statutes
are now or hereafter in force; provided however, that the person seeking
indemnification shall provide to the Corporation a written affirmation of his
good faith belief that the standard of conduct necessary for indemnification by
the
Part C - Page 4
<PAGE>
Corporation has been met and a written undertaking by or on behalf of the
Director to repay any such advance if it is ultimately determined that he is not
entitled to indemnification, and provided further that at least one of the
following additional conditions is met: (1) the person seeking indemnification
shall provide a security in form and amount acceptable to the Corporation for
his undertaking; (2) the Corporation is insured against losses arising by reason
of the advance; or (3) a majority of a quorum of Directors of the Corporation
who are neither "interested persons" as defined in Section 2(a)(19) of the 1940
Act, as amended, nor parties to the proceeding ("disinterested non-party
Directors") or independent legal counsel, in a written opinion, shall determine,
based on a review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
SECTION 3. Procedure. At the request of any current or former Director
or officer, or any employee or agent whom the Corporation proposes to indemnify,
the Board of Directors shall determine, or cause to be determined, in a manner
consistent with the Maryland General Corporation Law, the Securities Act of 1933
and the 1940 Act, as such statutes are now or hereafter in force, whether the
standards required by this Article V have been met; provided, however, that
indemnification shall be made only following: (1) a final decision on the merits
by a court or other body before whom the proceeding was brought that the person
to be indemnified was not liable by reason of disabling conduct or (2) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the person to be indemnified was not liable by reason of
disabling conduct, by (a) the vote of the majority of a quorum of disinterested
non-party Directors or (b) an independent legal counsel in a written opinion.
SECTION 4. Indemnification of Employees and Agents. Employees and
agents who are not officers or Directors of the Corporation may be indemnified,
and reasonable expenses may be advanced to such employees or agents, in
accordance with the procedures set forth in this Article V to the extent
permissible under the Maryland General Corporation Law, the Securities Act of
1933 and the 1940 Act, as such statutes are now or hereafter in force, and to
such further extent, consistent with the foregoing, as may be provided by action
of the Board of Directors or by contract.
SECTION 5. Other Rights. The indemnification provided by this Article V
shall not be deemed exclusive of any other right, in respect of indemnification
or otherwise, to which those seeking such indemnification may be entitled under
any insurance or other agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action by a Director or officer of the
Corporation in his official capacity and as to action by such person in another
capacity while holding such office or position, and shall continue as to a
person who has ceased to be a Director or officer and shall inure to the benefit
of the heirs, executors and administrators of such a person.
SECTION 6. Constituent, Resulting or Surviving Corporations. For the
purposes of this Article V, references to the "Corporation" shall include all
constituent corporations absorbed in a consolidation or merger as well as the
resulting or surviving corporation so that any person who is or was a Director,
officer, employee or agent of a constituent corporation or is or was serving at
the request of a constituent corporation as a Director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise shall stand in the same position under this Article V with respect to
the resulting or surviving corporation as he would if he had served the
resulting or surviving corporation in the same capacity.
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 and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Part C - Page 5
<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**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member, Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company 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 and 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 o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Part C - Page 6
<PAGE>
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>
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)
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Part C - Page 7
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
Thomas F. McDonough Clerk Vice President and
Two International Place Secretary
Boston, MA 02110
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President, Assistant
345 Park Avenue Legal Officer and Assistant Clerk Secretary and Trustee
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Part C - Page 8
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
David B. Watts Assistant Treasurer None
Two International Place
Boston, MA 02110
</TABLE>
<TABLE>
<CAPTION>
(c)
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other Compensation
Underwriter Commissions and Repurchases Commissions
----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</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.
Part C - Page 9
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and 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 16th day of February, 1999.
SCUDDER TAX FREE TRUST
By /s/Thomas F. McDonough
-------------------------------
Thomas F. McDonough,
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce* President (Principal Executive February 16, 1999
Officer) and Trustee
/s/Henry P. Becton, Jr.
- --------------------------------------
Henry P. Becton, Jr.* Trustee February 16, 1999
/s/Dawn-Marie Driscoll
- --------------------------------------
Dawn-Marie Driscoll* Trustee February 16, 1999
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee February 16, 1999
/s/George M. Lovejoy, Jr.
- --------------------------------------
George M. Lovejoy, Jr.* Trustee February 16, 1999
/s/Wesley W. Marple, Jr.
- --------------------------------------
Wesley W. Marple, Jr.* Trustee February 16, 1999
/s/Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk* Vice President and Trustee February 16, 1999
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Jean C. Tempel Trustee February 16, 1999
- --------------------------------------
Jean C. Tempel*
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and February 16, 1999
Accounting Officer)
</TABLE>
*By: /s/Thomas F. McDonough
------------------------------------------------------
Thomas F. McDonough,
Attorney-in-fact pursuant to powers of attorney
contained in the signature pages of Post-Effective
Amendment Nos. 13 to the Registration Statement
filed on May 1, 1991, Post-Effective Amendment No.
24 to the Registration Statement filed on March 1,
1997 and Post-Effective Amendment No. 28 to the
Registration Statement filed on December 29, 1997.
2
<PAGE>
File No. 2-81105
File No. 811-3632
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 31
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 31
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER TAX FREE TRUST
<PAGE>
SCUDDER TAX FREE TRUST
EXHIBIT INDEX
Exhibit (j)
Exhibit (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 31 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder Tax Free Trust, comprised of Scudder Limited Term Tax Free Fund and
Scudder Medium Term Tax Free Fund, of our reports dated December 4, 1998 and
February 16, 1999, respectively, on the financial statements and financial
highlights appearing in the October 31, 1998 and December 31, 1998 Annual
Reports to the Shareholders of Scudder Limited Term Tax Free and Scudder Medium
Term Tax Free Fund, which are also incorporated by reference into the
Registration Statement. We further consent to the references to our Firm under
the headings "Financial Highlights," in the Prospectus and "Experts" in the
Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit (n)
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Scudder Limited Term Tax Free Fund Annual Report for the fiscal year ended
10/31/98 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> Scudder Limited Term Tax Free Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 122,460,504
<INVESTMENTS-AT-VALUE> 127,633,109
<RECEIVABLES> 1,986,181
<ASSETS-OTHER> 74,660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 129,693,950
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 519,813
<TOTAL-LIABILITIES> 519,813
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 124,156,098
<SHARES-COMMON-STOCK> 10,536,316
<SHARES-COMMON-PRIOR> 9,639,451
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (154,566)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,172,605
<NET-ASSETS> 129,174,137
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,452,037
<OTHER-INCOME> 0
<EXPENSES-NET> 994,155
<NET-INVESTMENT-INCOME> 5,457,882
<REALIZED-GAINS-CURRENT> (139,113)
<APPREC-INCREASE-CURRENT> 1,558,802
<NET-CHANGE-FROM-OPS> 6,877,571
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,457,882)
<DISTRIBUTIONS-OF-GAINS> (57,180)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 68,479,028
<NUMBER-OF-SHARES-REDEEMED> 2,328,280
<SHARES-REINVESTED> (59,872,051)
<NET-CHANGE-IN-ASSETS> 12,297,766
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 41,727
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 794,767
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,081,030
<AVERAGE-NET-ASSETS> 132,552,952
<PER-SHARE-NAV-BEGIN> 12.12
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.26
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Medium Term Tax Free Fund Annual Report for the fiscal year ended 12/31/98 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> Scudder Medium Term Tax Free Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 626,845,301
<INVESTMENTS-AT-VALUE> 671,243,963
<RECEIVABLES> 11,889,717
<ASSETS-OTHER> 14,265
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 683,147,945
<PAYABLE-FOR-SECURITIES> 2,987,312
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,970,078
<TOTAL-LIABILITIES> 4,957,390
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 633,579,122
<SHARES-COMMON-STOCK> 59,066,560
<SHARES-COMMON-PRIOR> 57,554,739
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 212,771
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,398,662
<NET-ASSETS> 678,190,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 35,234,097
<OTHER-INCOME> 0
<EXPENSES-NET> 4,858,272
<NET-INVESTMENT-INCOME> 30,375,825
<REALIZED-GAINS-CURRENT> 2,094,910
<APPREC-INCREASE-CURRENT> 3,869,091
<NET-CHANGE-FROM-OPS> 36,339,826
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (30,380,935)
<DISTRIBUTIONS-OF-GAINS> (2,121,192)
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<NUMBER-OF-SHARES-REDEEMED> (152,419,713)
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,858,272
<AVERAGE-NET-ASSETS> 673,479,176
<PER-SHARE-NAV-BEGIN> 11.41
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> (0.52)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.48
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
