Filed electronically with the Securities and Exchange Commission on
September 29, 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. 33 /_X_/
And/or --
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 33 /_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) 295-2572
--------------
John Millette
-------------
Scudder Kemper Investments, Inc.
--------------------------------
Two International Place
-----------------------
Boston, Massachusetts 02110-4103
--------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/___/ Immediately upon filing pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a) (1)
/___/ 75 days after filing pursuant to paragraph (a) (2)
/_X_/ On October 1, 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
- --------------------
BOND/TAX FREE
- --------------------
U.S. Tax Free
Income Funds
Scudder Limited Term
Tax Free Fund Fund #044
Scudder Medium
Term Tax Free Fund Fund #045
Scudder Managed
Municipal Bonds Fund #066
Scudder High Yield
Tax Free Fund Fund #008
Prospectus
October 1, 1999
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder U.S. Tax Free Income Funds
How the funds work
2 Limited Term Tax Free Fund
6 Medium Term Tax Free Fund
10 Managed Municipal Bonds
14 High Yield Tax Free Fund
18 Other Policies and Risks
19 Who Manages and Oversees the Funds
22 Financial Highlights
How to invest in the funds
27 How to Buy Shares
28 How to Exchange or Sell Shares
29 Policies You Should Know About
34 Understanding Distributions and Taxes
<PAGE>
How the funds work
These funds invest mainly in municipal bonds and other investments whose income
is expected to be free from regular federal income tax.
Taken as a group, they represent a spectrum of approaches to investing for
tax-free income, from a conservative approach that emphasizes stability of share
price to a more aggressive (and more risky) approach that focuses on high
income. Each fund follows its own goal.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency. Their share
prices could go up and down, so be aware that you could lose money.
You can access all Scudder fund prospectuses online at: www.scudder.com
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SCLTX fund number | 044
Scudder Limited Term Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks as high a level of income exempt from regular federal income tax
as is consistent with a high degree of principal stability. It does this by
investing at least 80% of net assets in securities of municipalities across the
United States and in other securities whose income is free from regular federal
income tax.
The fund can buy many types of municipal securities with maturities of ten years
or less. These may include revenue bonds (which are backed by revenues from a
particular source) and general obligation bonds (which are typically backed by
the issuer's ability to levy taxes), as well as municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
one and five years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities, or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING TWO PARAGRAPHS.
- ------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 65% of net assets in municipal securities of
the top three grades of credit quality.
The fund could put up to 35% of net assets in bonds rated in the fourth credit
grade, which is still considered investment-grade.
2 | Scudder Limited Term Tax Free Fund
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
This fund may make sense for taxpayers in a moderate to high tax bracket who
want higher yield than a money market fund and can accept some risk to their
principal.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. The fund's relatively short
dollar-weighted average maturity should reduce the effect of this risk, but will
not eliminate it. Changes in interest rates will also affect the fund's yield:
when rates fall, fund yield tends to fall as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may emphasize investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could emphasize municipal lease obligations,
which are more likely to default or to become difficult to sell because they
carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
Scudder Limited Term Tax Free Fund | 3
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. This page looks at fund
performance two different ways: year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the fund's total returns have varied from year to year,
which may give some idea of risk. The table shows how the fund's returns over
different periods average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not have any fees or
expenses). All figures on this page assume reinvestment of dividends and
distributions.
- ---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- ---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
9.38 3.99 5.87 4.92
- ----------------------------------------
'95 '96 '97 '98
- ---------------------------------------------------------------
1999 Total Return as of June 30: -0.37%
Best Quarter: 3.24%, Q1 1995 Worst Quarter: 0.21%, Q1 1996
- ---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1998
- ---------------------------------------------------------------
Since
1 Year Inception
- ---------------------------------------------------------------
Fund 4.92 5.00*
- ---------------------------------------------------------------
Index 5.21 5.10**
- ---------------------------------------------------------------
Index: Lehman Brothers 3-Year Municipal Bond Index, a market value-weighted
measure of the short-term municipal bond market that includes bonds with
maturities of two to three years.
Total Returns for 1995-1998 would have been lower if operating expenses hadn't
been maintained.
* Fund inception: 2/15/1994
** Since 2/28/1994
4 | Scudder Limited Term Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
- ---------------------------------------------------------------
Fee Table
- ---------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
- ---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- ---------------------------------------------------------------
Management Fee 0.60%
- ---------------------------------------------------------------
Distribution (12b-1) Fee None
- ---------------------------------------------------------------
Other Expenses* 0.21%
-------
- ---------------------------------------------------------------
Total Annual Operating Expenses** 0.81%
- ---------------------------------------------------------------
Expense Reimbursement 0.06%
-------
- ---------------------------------------------------------------
Net Annual Operating Expenses** 0.75%
- ---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services, and
similar expenses, which may vary with fund size and other factors.
** By contract, total operating expenses are capped at 0.75% through 9/30/2000.
- ---------------------------------------------------------------
Expense Example
- ---------------------------------------------------------------
Based on the costs above (including one year of capped expenses in each period),
this example is designed to help you compare this fund's expenses to those of
other funds. The example assumes you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions, and sold your shares at the end of
each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------
$77 $253 $444 $996
- ---------------------------------------------------------------
Scudder Limited Term Tax Free Fund | 5
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SCMTX fund number | 045
Scudder Medium Term Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks a high level of income free from regular federal income taxes and
seeks to limit principal fluctuation. It does this by investing at least 80% of
net assets in securities of municipalities across the United States and in other
securities whose income is free from regular federal income tax.
The fund can buy many types of municipal securities with maturities of 15 years
or less. These may include revenue bonds (which are backed by revenues from a
particular source) and general obligation bonds (which are typically backed by
the issuer's ability to levy taxes), as well as municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
five and ten years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities, or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING TWO PARAGRAPHS.
- ------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 65% of net assets in municipal securities of
the top three grades of credit quality.
The fund could put up to 35% of net assets in bonds rated in the fourth credit
grade, which is still considered investment-grade.
6 | Scudder Medium Term Tax Free Fund
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
This fund may make sense for taxpayers in a moderate to high tax bracket who
want higher yield than a short-term, tax-free investment and can accept moderate
risk to their principal.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. The fund's focus on intermediate-term
bonds should reduce the effect of this risk somewhat, but will not eliminate it.
Changes in interest rates will also affect the fund's yield: when rates fall,
fund yield tends to fall as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may emphasize investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could emphasize municipal lease obligations,
which are more likely to default or to become difficult to sell because they
carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
Scudder Medium Term Tax Free Fund | 7
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. This page looks at fund
performance two different ways: year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the fund's total returns have varied from year to year,
which may give some idea of risk. The table shows how the fund's returns over
different periods average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not have any fees or
expenses). All figures on this page assume reinvestment of dividends and
distributions.
- ---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- ---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
6.00 6.29 12.13 8.93 10.94 -3.50 14.32 4.02 7.69 5.58
- --------------------------------------------------------------------------------
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: -1.42%
Best Quarter: 5.09%, Q1 1995 Worst Quarter: -4.02%, Q1 1994
- ---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1998
- ---------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
Fund 5.58 5.46 7.13
- ---------------------------------------------------------------
Index 6.48 6.22 8.22
- ---------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States. Generally, the Index's average
maturity is longer than the fund's, meaning that the Index is generally more
volatile than the fund.
8 | Scudder Medium Term Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
- ---------------------------------------------------------------
Fee Table
- ---------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
- ---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- ---------------------------------------------------------------
Management Fee 0.57%
- ---------------------------------------------------------------
Distribution (12b-1) Fee None
- ---------------------------------------------------------------
Other Expenses* 0.15%
-------
- ---------------------------------------------------------------
Total Annual Operating Expenses 0.72%
- ---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services, and
similar expenses, which may vary with fund size and other factors.
- ---------------------------------------------------------------
Expense Example
- ---------------------------------------------------------------
Based on the costs above, this example is designed to help you compare this
fund's expenses to those of other funds. The example assumes you invested
$10,000, earned 5% annual returns, reinvested all dividends and distributions,
and sold your shares at the end of each period. This is only an example; actual
expenses will be different.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------
$74 $230 $401 $894
- ---------------------------------------------------------------
Scudder Medium Term Tax Free Fund | 9
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SCMBX fund number | 066
Scudder Managed Municipal Bonds
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks income exempt from regular federal income tax. It does this by
investing at least 80% of net assets in securities of municipalities across the
United States and in other securities whose income is free from regular federal
income tax.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes), as well as municipal lease obligations and investments
representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it similar
to that of the Lehman Brothers Municipal Bond Index (13.19 years as of
5/31/1999). Also, while they're permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities, or
securities), the managers don't intend to use them as principal investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING TWO PARAGRAPHS.
- ------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 65% of net assets in municipal securities of
the top three grades of credit quality.
The fund could put up to 10% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). compared to investment-grade
bonds, junk bonds generally pay higher yields and have higher volatility and
higher risk of default on payments of interest or principal.
10 | Scudder Managed Municipal Bonds
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
Taxpayers who are in a moderate to high tax bracket and who are looking for
current income may want to consider this fund.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's dollar-weighted
average maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may emphasize investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could emphasize municipal lease obligations,
which are more likely to default or to become difficult to sell because they
carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them; this risk may be greater for junk bonds
than for investment-grade bonds
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
Scudder Managed Municipal Bonds | 11
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. This page looks at fund
performance two different ways: year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the fund's total returns have varied from year to year,
which may give some idea of risk. The table shows how the fund's returns over
different periods average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not have any fees or
expenses). All figures on this page assume reinvestment of dividends and
distributions.
- ---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- ---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
11.19 6.77 12.23 8.98 13.32 -6.04 17.12 4.15 9.29 6.23
- --------------------------------------------------------------------------------
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: -1.87%
Best Quarter: 6.69%, Q1 1995 Worst Quarter: -6.17%, Q1 1994
- ---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1998
- ---------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
Fund 6.23 5.88 8.15
- ---------------------------------------------------------------
Index 6.48 6.22 8.22
- ---------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
12 | Scudder Managed Municipal Bonds
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
- ---------------------------------------------------------------
Fee Table
- ---------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
- ---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- ---------------------------------------------------------------
Management Fee 0.51%
- ---------------------------------------------------------------
Distribution (12b-1) Fee None
- ---------------------------------------------------------------
Other Expenses* 0.13%
-------
- ---------------------------------------------------------------
Total Annual Operating Expenses 0.64%
- ---------------------------------------------------------------
* Includes costs of shareholder servicing, custody,
accounting services, and similar expenses, which may
vary with fund size and other factors.
- ---------------------------------------------------------------
Expense Example
- ---------------------------------------------------------------
Based on the costs above, this example is designed to help you compare this
fund's expenses to those of other funds. The example assumes you invested
$10,000, earned 5% annual returns, reinvested all dividends and distributions,
and sold your shares at the end of each period. This is only an example; actual
expenses will be different.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------
$65 $205 $357 $798
- ---------------------------------------------------------------
Scudder Managed Municipal Bonds | 13
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SHYTX fund number | 008
Scudder High Yield Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks to provide a high level of income exempt from regular federal
income tax. It does this by investing at least 80% of net assets in securities
of municipalities across the United States and in other securities whose income
is free from regular federal income tax.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes), as well as municipal lease obligations and investments
representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
10 and 13 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities, or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING TWO PARAGRAPHS.
- ------------------------------------------------------------------------
Credit Quality Policies
This fund normally invests at least 50% of total assets in municipal securities
of the top four grades of credit quality.
The fund could put up to 50% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds generally pay higher yields and have higher volatility and
higher risk of default on payments of interest or principal.
14 | Scudder High Yield Tax Free Fund
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
This fund may be appropriate for individuals in a moderate to high tax bracket
who are willing to accept risk to their principal in exchange for the potential
for high current income.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
One main factor is credit quality. Because the issuers of high yield municipal
bonds may be in uncertain financial health, the prices of these bonds can be
vulnerable to bad fiscal, political, or economic news. In some cases, bonds may
decline in credit quality or go into default. To the extent that the fund
emphasizes certain geographic regions or sectors it increases these risks. For
example, the fund could emphasize municipal lease obligations, which are more
likely to default or to become difficult to sell because they carry limited
credit backing. Credit risks are greater for junk bonds than for
investment-grade bonds.
A rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's dollar-weighted
average maturity could make it more sensitive to this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends, credit
quality, or other matters
o some types of bonds could be paid off earlier than expected, which would hurt
the fund's performance
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them; this risk may be greater for junk bonds
than for investment-grade bonds
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
Scudder High Yield Tax Free Fund | 15
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. This page looks at fund
performance two different ways: year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the fund's total returns have varied from year to year,
which may give some idea of risk. The table shows how the fund's returns over
different periods average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not have any fees or
expenses). All figures on this page assume reinvestment of dividends and
distributions.
- ---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- ---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
10.32 6.02 13.46 10.88 13.85 -8.38 19.28 4.43 12.04 6.38
- --------------------------------------------------------------------------------
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 2.21%
Best Quarter: 8.46%, Q1 1995 Worst Quarter: -6.37%, Q1 1994
- ---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1998
- ---------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
Fund 6.38 6.35 8.58
- ---------------------------------------------------------------
Index 6.48 6.22 8.22
- ---------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
16 | Scudder High Yield Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
- ---------------------------------------------------------------
Fee Table
- ---------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
- ---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- ---------------------------------------------------------------
Management Fee 0.63%
- ---------------------------------------------------------------
Distribution (12b-1) Fee None
- ---------------------------------------------------------------
Other Expenses* 0.20%
-------
- ---------------------------------------------------------------
Total Annual Operating Expenses 0.83%
- ---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services, and
similar expenses, which may vary with fund size and other factors.
- ---------------------------------------------------------------
Expense Example
- ---------------------------------------------------------------
Based on the costs above, this example is designed to help you compare this
fund's expenses to those of other funds. The example assumes you invested
$10,000, earned 5% annual returns, reinvested all dividends and distributions,
and sold your shares at the end of each period. This is only an example; actual
expenses will be different.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------
$85 $265 $460 $1,025
- ---------------------------------------------------------------
Scudder High Yield Tax Free Fund | 17
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could change
that fund's investment goal without seeking shareholder approval. However,
each fund's policy for investing at least 80% of its net assets that is
described earlier in this prospectus cannot be changed without shareholder
approval.
o As a temporary defensive measure, any of these funds could shift up to 100%
of assets into cash or investments such as taxable money market securities.
This could help prevent losses, but would mean that the fund was not pursuing
its goal.
o The investment adviser establishes a security's credit grade when it buys the
security, using independent ratings or, for unrated securities, its own
credit ratings. When ratings don't agree, the fund may use the higher rating.
If a security's credit rating falls, the security will be sold unless the
adviser believes this would not be in the shareholders' best interests.
Year 2000 readiness
Like all mutual funds, these funds could be affected by the inability of some
computer systems to recognize the year 2000. The investment adviser has a year
2000 readiness program designed to address this problem, and is also researching
the readiness of suppliers and business partners as well as issuers of
securities the funds own. Still, there's some risk that the year 2000 problem
could materially affect a fund's operations (such as its ability to calculate
net asset value and process purchases and redemptions), its investments, or
securities markets in general.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING TWO PARAGRAPHS.
- ------------------------------------------------------------------------
FOR MORE INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on a fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the SAI (the back cover has information on how to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
18 | Other Policies and Risks
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
Scudder Kemper, the company with overall responsibility for managing the funds,
takes a team approach to asset management.
- --------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The investment adviser for these funds is Scudder Kemper Investments, Inc.,
located at 345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more
than 80 years of experience managing mutual funds, and currently has more than
$290 billion in assets under management.
Each fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders, and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of
average daily net assets:
Fund Name Fee Paid
- ---------------------------------------------------------------
Scudder Limited Term Tax Free Fund 0.60%
- ---------------------------------------------------------------
Scudder Medium Term Tax Free Fund 0.57%
- ---------------------------------------------------------------
Scudder Managed Municipal Bonds 0.51%
- ---------------------------------------------------------------
Scudder High Yield Tax Free Fund 0.63%
- ---------------------------------------------------------------
Who Manages and Oversees the Funds | 19
<PAGE>
The portfolio managers
Below are the people who handle the day-to-day management of each fund in this
prospectus.
Scudder Limited Term Tax Free Fund
Ashton P. Goodfield
Lead Portfolio Manager
o Began investment career in 1986
o Joined the adviser in 1986
o Joined the fund team in 1994
Philip G. Condon
o Began investment career in 1978
o Joined the adviser in 1983
o Joined the fund team in 1998
Scudder Medium Term Tax Free Fund
Ashton P. Goodfield
Lead Portfolio Manager
o Began investment career in 1986
o Joined the adviser in 1986
o Joined the fund team in 1998
Philip G. Condon
o Began investment career in 1978
o Joined the adviser in 1983
o Joined the fund team in 1999
Scudder Managed Municipal Bonds
Philip G. Condon
Co-lead Portfolio Manager
o Began investment career in 1978
o Joined the adviser in 1983
o Joined the fund team in 1998
Ashton P. Goodfield
Co-lead Portfolio Manager
o Began investment career in 1986
o Joined the adviser in 1986
o Joined the fund team in 1998
Scudder High Yield Tax Free Fund
Philip G. Condon
Lead Portfolio Manager
o Began investment career in 1978
o Joined the adviser in 1983
o Joined the fund team in 1987
Rebecca L. Wilson
o Began investment career in 1986
o Joined the adviser in 1986
o Joined the fund team in 1998
20 | Who Manages and Oversees the Funds
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of each Board is not affiliated with Scudder Kemper. The
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders. The following people comprise
each fund's board.
Lynn S. Birdsong
o Managing Director of Scudder
Kemper Investments, Inc.
o President of the funds
Henry P. Becton, Jr.
o President and General Manager, WGBH
Educational Foundation
Dawn-Marie Driscoll
o Executive Fellow, Center for
Business Ethics, Bentley College
o President, Driscoll Associates
(consulting firm)
Peter B. Freeman
o Corporate director and trustee
George M. Lovejoy, Jr.
o President and Director, Fifty
Associates (real estate corporation)
Wesley W. Marple, Jr.
o Professor of Business Administration,
Northeastern University, College of
Business Administration
Kathryn L. Quirk
o Managing Director of Scudder
Kemper Investments, Inc.
o Vice President and Assistant Secretary
of the funds
Jean C. Tempel
o Venture Partner, Internet Capital Corp.
(internet holding company)
Who Manages and Oversees the Funds | 21
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Scudder Limited Term Tax Free Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended October 31, 1999(a) 1998 1997 1996 1995 1994(b)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $12.26 $12.12 $11.98 $12.01 $11.67 $12.00
-------------------------------------------------------
- -----------------------------------------------------------------------------------
Income from investment operations:
- -----------------------------------------------------------------------------------
Net investment income .29 .50 .52 .53 .56 .38
- -----------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments (.16) .15 .16 (.02) .34 (.33)
-------------------------------------------------------
- -----------------------------------------------------------------------------------
Total from investment
operations .13 .65 .68 .51 .90 .05
- -----------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------
Net investment income (.29) (.50) (.52) (.53) (.56) (.38)
- -----------------------------------------------------------------------------------
Net realized gain on
investment transactions -- (.01) (.02) (.01) -- --
-------------------------------------------------------
- -----------------------------------------------------------------------------------
Total distributions (.29) (.51) (.54) (.54) (.56) (.38)
-------------------------------------------------------
- -----------------------------------------------------------------------------------
Net asset value, end of
period $12.10 $12.26 $12.12 $11.98 $12.01 $11.67
-------------------------------------------------------
- -----------------------------------------------------------------------------------
Total Return (%) (c) 1.05** 5.37 5.89 4.33 7.94 .44**
- -----------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 107 129 117 124 122 68
- -----------------------------------------------------------------------------------
Ratio of operating expenses,
net to average daily net
assets (%) .75* .75 .75 .63 .23 --
- -----------------------------------------------------------------------------------
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) .81* .82 .83 .82 .85 1.29*
- -----------------------------------------------------------------------------------
Ratio of net investment
income to average daily net
assets (%) 4.06* 4.12 4.32 4.46 4.78 4.84*
- -----------------------------------------------------------------------------------
Portfolio turnover rate (%) 5.6* 23.2 17.8 37.7 37.5 36.3*
- -----------------------------------------------------------------------------------
</TABLE>
(a) Seven months ended May 31, 1999. On August 10, 1998, the Board changed the
fiscal year end of the fund from October 31 to May 31.
(b) For the period February 15, 1994 (commencement of operations) to October 31,
1994.
(c) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
22 | Financial Highlights
<PAGE>
Scudder Medium Term Tax Free Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended December 31, 1999(a) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $11.48 $11.41 $11.15 $11.26 $10.39 $11.36
--------------------------------------------------------
- -----------------------------------------------------------------------------------
Income from investment operations:
- -----------------------------------------------------------------------------------
Net investment income .21 .52 .52 .53 .54 .53
- -----------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions (.21) .11 .31 (.09) .92 (.92)
--------------------------------------------------------
- -----------------------------------------------------------------------------------
Total from investment
operations -- .63 .83 .44 1.46 (.39)
- -----------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------
Net investment income (.21) (.52) (.52) (.53) (.54) (.53)
- -----------------------------------------------------------------------------------
Net realized gains on
investment transactions (.01) (.04) (.05) (.02) (.05) (.05)
--------------------------------------------------------
- -----------------------------------------------------------------------------------
Total distributions (.22) (.56) (.57) (.55) (.59) (.58)
--------------------------------------------------------
- -----------------------------------------------------------------------------------
Net asset value, end of
period $11.26 $11.48 $11.41 $11.15 $11.26 $10.39
--------------------------------------------------------
- -----------------------------------------------------------------------------------
Total Return (%) (.02)** 5.58 7.69 4.02 14.32(b) (3.50)(b)
- -----------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 643 678 657 651 712 701
- -----------------------------------------------------------------------------------
Ratio of operating expenses
net, to average daily net
assets (%) .72* .72 .74 .72 .70 .63
- -----------------------------------------------------------------------------------
Ratio of operating expenses
before expense reductions,
to average daily net assets .72* .72 .74 .72 .72 .71
- -----------------------------------------------------------------------------------
Ratio of net investment
income to average daily net
assets (%) 4.49* 4.51 4.67 4.75 4.92 4.94
- -----------------------------------------------------------------------------------
Portfolio turnover rate (%) 12.5* 10.8 13.4 14.1 36.1 33.8
- -----------------------------------------------------------------------------------
</TABLE>
(a) Five months ended May 31,1999. On August 10, 1998, the Board changed the
fiscal year end of the fund from December 31 to May 31.
(b) Total returns may have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
Financial Highlights | 23
<PAGE>
<TABLE>
<CAPTION>
Scudder Managed Municipal Bonds
- -------------------------------------------------------------------------------------
Years ended December 31, 1999(a) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $9.18 $9.13 $8.84 $8.94 $8.07 $9.09
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------
Net investment income .19 .45 .46 .45 .48 .46
- -------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions (.20) .10 .34 (.10) .87 (1.00)
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Total from investment
operations (.01) .55 .80 .35 1.35 (.54)
- -------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------
Net investment income (.19) (.45) (.46) (.45) (.48) (.46)
- -------------------------------------------------------------------------------------
Net realized gains on
investment transactions -- (.05) (.05) -- -- (.02)
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Total distributions (.19) (.50) (.51) (.45) (.48) (.48)
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Net asset value, end of
period $8.98 $9.18 $9.13 $8.84 $8.94 $8.07
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Total Return (%) (.17)** 6.23 9.29 4.15 17.12 (6.04)
- -------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 713 737 728 737 775 709
- -------------------------------------------------------------------------------------
Ratio of operating expenses
to average daily net assets
(%) .64* .62 .64 .63 .63 .63
- -------------------------------------------------------------------------------------
Ratio of net investment
income to average daily net
assets (%) 4.92* 4.96 5.12 5.20 5.59 5.41
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 13.8* 8.6 9.8 12.2 17.8 33.7
- -------------------------------------------------------------------------------------
</TABLE>
(a) Five months ended May 31, 1999. On August 10, 1998, the Board changed the
fiscal year end of the fund from December 31 to May 31.
* Annualized
** Not annualized
24 | Financial Highlights
<PAGE>
Scudder High Yield Tax Free Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years ended December 31, 1999(a) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $12.93 $12.78 $12.04 $12.19 $10.86 $12.55
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------
Net investment income .26 .65 .67 .66 .68 .70
- -------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions (.24) .15 .74 (.15) 1.37 (1.73)
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Total from investment
operations .02 .80 1.41 .51 2.05 (1.03)
- -------------------------------------------------------------------------------------
Less distributions from net
investment income (.26) (.65) (.67) (.66) (.72) (.66)
- -------------------------------------------------------------------------------------
Net asset value, end of
period $12.69 $12.93 $12.78 $12.04 $12.19 $10.86
--------------------------------------------------------
- -------------------------------------------------------------------------------------
Total Return (%) .18** 6.38 12.04 4.43(b) 19.28(b) (8.38)(b)
- -------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 450 432 337 293 304 260
- -------------------------------------------------------------------------------------
Ratio of operating
expenses, net to average
daily net assets (%) .83* .84 .90 .91 .80 .80
- -------------------------------------------------------------------------------------
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) .83* .84 .90 .95 .94 .97
- -------------------------------------------------------------------------------------
Ratio of net investment
income to average daily net
assets (%) 4.91* 5.03 5.43 5.59 5.77 6.01
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 7.4* 14.3 33.2 21.9 27.3 34.3
- -------------------------------------------------------------------------------------
</TABLE>
(a) Five months ended May 31, 1999. On August 10, 1998, the Board changed the
fiscal year end of the fund from December 31 to May 31.
(b) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
Financial Highlights | 25
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket, or financial adviser -- your provider
may have its own policies or instructions, and you should follow those.
<PAGE>
How to Buy Shares
Use these instructions to invest directly with Scudder. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
First investment Additional investments
- -------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$50 or more with an Automatic
Investment Plan
- -------------------------------------------------------------------------------------
By mail or o Fill out and sign an o Send a check and a Scudder
express application investment slip to us at the
(see below) appropriate address below
o Send it to us at the
appropriate address, along o If you don't have an
with an investment check investment slip, simply
include a letter with your
name, account number, the
full name of the fund, and
your investment instructions
- --------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
- --------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
- --------------------------------------------------------------------------------
With an automatic -- o To set up regular investments
investment from a bank checking account,
plan call 1-800-SCUDDER
- --------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
- --------------------------------------------------------------------------------
How to Buy Shares | 27
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in an account opened directly
with Scudder.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exchanging into another fund Selling shares
- --------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account most for over $100,000, can
only be ordered in writing; if
$100 or more for exchanges you're in doubt, see page 31
between existing accounts
- --------------------------------------------------------------------------------
By phone o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
or wire instructions instructions
- --------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
- --------------------------------------------------------------------------------
By mail, express, Write a letter that includes: Write a letter that includes:
or fax (see
previous page) o the fund, class, and account o the fund, class, and account
number you're exchanging number from which you want to
out of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s),
fund you want to exchange into and address, as they appear on
your account
o your name(s), signature(s),
and address, as they appear o a daytime telephone number
on your account
o a daytime telephone number
- --------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder fund
account, call 1-800-SCUDDER
- --------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
- --------------------------------------------------------------------------------
Using Checkwriting -- o On Scudder Limited Term Tax
Free Fund and Scudder Medium
Term Tax Free Fund only; call
1-800-SCUDDER
- --------------------------------------------------------------------------------
</TABLE>
28 | How to Exchange or Sell Shares
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
Questions? You can speak to a Scudder representative between 8 a.m. and 8 p.m.
eastern time on any fund business day by calling 1-800-SCUDDER.
- --------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business whenever the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
Policies You Should Know About | 29
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
The Scudder Web site can be a valuable resource for shareholders with Internet
access. Go to www.scudder.com to get up-to-date information, review balances or
even place orders for exchanges.
- --------------------------------------------------------------------------------
Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. However, with Scudder Limited Term Tax Free
Fund, wire transactions that arrive by 12:00 noon eastern time will receive that
day's dividend.
When selling shares, you'll generally receive the dividend for the day on which
your shares were sold.
SAIL(TM), the Scudder Automated Information Line, is available 24 hours a day by
calling 1-800-343-2890. You can use SAIL to get information on Scudder funds
generally and on accounts held directly at Scudder. You can also use it to make
exchanges and sell shares.
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.
Checkwriting, available on Scudder Limited Term Tax Free Fund and Scudder Medium
Term Tax Free Fund, lets you sell fund shares by writing a check. Your
investment keeps earning dividends until your check clears. Please note that you
should not write checks for less than $100, and that we can't honor any check
larger than your balance at the time the check is presented to us. It's not a
good idea to close out an account using a check because the account balance
could change between the time you write the check and the time it is processed.
30 | Policies You Should Know About
<PAGE>
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
shares directly from Scudder and for many other investors as well. Exchanges are
a shareholder privilege, not a right: we may reject or limit any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject or limit purchase orders, for
these or other reasons.
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers and
most banks, savings institutions, and credit unions. Note that you can't get a
signature guarantee from a notary public.
Policies You Should Know About | 31
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
- --------------------------------------------------------------------------------
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share price
For each fund in this prospectus, the price at which you buy and sell shares is
the net asset value per share, or NAV. To calculate NAV, the funds use the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
32 | Policies You Should Know About
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o charge you $10 a year if your account balance falls below $2,500, and close
your account and send you the proceeds if your balance falls below $1,000; in
either case, we will give you 60 days' notice so you can either increase your
balance or close your account (these policies don't apply to retirement
accounts, to investors with $100,000 or more in Scudder fund shares, or in
any case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; in most cases, a fund won't make a
redemption-in-kind unless your requests over a 90-day period total more than
$250,000 or 1% of the fund's assets, whichever is less
o change, add, or withdraw various services, fees, and account policies (for
example, we may change or terminate the exchange privilege at any time)
o reject or limit purchases of shares for any reason
Policies You Should Know About | 33
<PAGE>
[ICON]
- --------------------------------------------------------------------------------
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
- --------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchases and sales of shares.) A
fund may not always pay a distribution for a given period.
The funds have a regular schedule for paying out any earnings to shareholders:
o Income dividends: declared daily and paid monthly
o Short-term and long-term capital gains: November or December, or otherwise as
needed
You can choose how to receive your dividends and capital gains. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and capital gains distributions will all be reinvested. For
retirement plans, reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you. Your
sales of shares may result in a capital gain or loss for you; whether long-term
or short-term depends on how long you owned the shares. For tax purposes, an
exchange is the same as a sale.
34 | Understanding Distributions and Taxes
<PAGE>
Dividends from these funds are generally free from federal income tax for most
shareholders. However, there are a few exceptions:
o a portion of a fund's dividends may be taxable as ordinary income if it came
from investments in taxable securities
o because each fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may owe
taxes on a portion of your dividends if you are among those investors who
must pay AMT
The following tables show the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the funds:
Generally taxed at ordinary income rates
- ---------------------------------------------------------------
o short-term capital gains from selling fund shares
- ---------------------------------------------------------------
o taxable income dividends you receive from a fund
- ---------------------------------------------------------------
o short-term capital gains distributions you receive from a
fund
- ---------------------------------------------------------------
Generally taxed at capital gains rates
- ---------------------------------------------------------------
o long-term capital gains from selling fund shares
- ---------------------------------------------------------------
o long-term capital gains distributions you receive from a
fund
- ---------------------------------------------------------------
Each fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
Understanding Distributions and Taxes | 35
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we mail one copy per
household. For more copies, call 1-800-SCUDDER.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a copying fee. If you
like, you can look over these materials in person at the SEC's Public Reference
Room in Washington, DC.
Scudder Funds SEC
PO Box 2291 450 Fifth Street, N.W.
Boston, MA 02107-2291 Washington, DC 20549-6009
1-800-SCUDDER 1-800-SEC-0330
www.scudder.com www.sec.gov
Fund Name SEC File #
- ----------------------------------------------------------
Scudder Limited Term Tax Free Fund 811-3632
- ----------------------------------------------------------
Scudder Medium Term Tax Free Fund 811-3632
- ----------------------------------------------------------
Scudder Managed Municipal Bonds 811-2671
- ----------------------------------------------------------
Scudder High Yield Tax Free Fund 811-2671
- ----------------------------------------------------------
<PAGE>
SCUDDER LIMITED TERM TAX FREE FUND
A series of Scudder Tax Free Trust
A Mutual Fund Which Seeks to Provide
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 Mutual Fund 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 Mutual Fund 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 Mutual Fund Specializing in the Management
of a Municipal Bond Portfolio of Primarily Investment-Grade Municipal Securities
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus and should
be read in conjunction with 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 October 1, 1999, as amended from
time to time, a copy of which may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Reports to Shareholders of Scudder Limited Term Tax Free Fund ,
Scudder Medium Term Tax Free Fund, Scudder Managed Municipal Bonds and Scudder
High Yield Tax Free Fund dated May 31, 1999, are incorporated by reference and
are hereby deemed to be part of this Statement of Additional Information. They
may also be obtained without charge by calling 1-800-SCUDDER.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
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
Specialized Investment Techniques Common to the Funds.....................................6
Investment Restrictions..................................................................17
PURCHASES.........................................................................................18
Additional Information About Opening An Account..........................................18
Minimum balances.........................................................................18
Additional Information About Making Subsequent Investments...............................19
Additional Information About Making Subsequent Investments by QuickBuy...................19
Checks...................................................................................20
Wire Transfer of Federal Funds...........................................................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 Checkwriting...............................................................23
Other Information........................................................................23
FEATURES AND SERVICES OFFERED BY THE FUNDS........................................................24
The No-Load Concept......................................................................24
Internet Access..........................................................................24
Dividend and Capital Gain Distribution Options...........................................25
Reports to Shareholders..................................................................25
Transaction Summaries....................................................................25
THE SCUDDER FAMILY OF FUNDS.......................................................................25
SPECIAL PLAN ACCOUNTS.............................................................................25
Automatic Withdrawal Plan................................................................28
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts, Nominees
and Corporations....................................................................28
Automatic Investment Plan................................................................28
Uniform Transfers/Gifts to Minors Act....................................................29
DIVIDENDS.........................................................................................29
PERFORMANCE INFORMATION...........................................................................29
Tax-Exempt Income vs. Taxable Income.....................................................32
Comparison of Fund Performance...........................................................33
ORGANIZATION OF THE FUNDS.........................................................................34
INVESTMENT ADVISER................................................................................35
Personal Investments by Employees of the Adviser.........................................38
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
TRUSTEES AND OFFICERS.............................................................................39
REMUNERATION......................................................................................41
Responsibilities of the Board -- Board and Committee Meetings............................41
Compensation of Officers and Trustees....................................................42
DISTRIBUTOR.......................................................................................43
TAXES.............................................................................................43
PORTFOLIO TRANSACTIONS............................................................................47
Brokerage Commissions....................................................................47
Portfolio Turnover.......................................................................47
NET ASSET VALUE...................................................................................48
ADDITIONAL INFORMATION............................................................................49
Experts..................................................................................49
Shareholder Indemnification..............................................................49
Ratings of Municipal Obligations.........................................................49
Commercial Paper Ratings.................................................................50
Glossary.................................................................................51
Other Information........................................................................52
FINANCIAL STATEMENTS..............................................................................53
Scudder Limited Term Tax Free Fund.......................................................53
Scudder Medium Term Tax Free Fund........................................................53
Scudder Managed Municipal Bonds..........................................................53
Scudder High Yield Tax Free Fund.........................................................54
</TABLE>
ii
<PAGE>
THE FUNDS AND THEIR OBJECTIVES
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."
Except as otherwise indicated, the Funds' objectives and policies are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that a Fund will achieve its objective. If there is a change in a
Fund's investment objective, shareholders should consider whether that Fund
remains an appropriate investment in light of their then current financial
position and needs.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Funds may engage (such
as short selling, hedging, etc.) or a financial instrument in which the Funds
may purchase (such as options, forward foreign currency contracts, etc.) are
meant to describe the spectrum of investments that Scudder Kemper Investments,
Inc. (the "Adviser"), in its discretion, might, but is not required to, use in
managing a Fund's portfolio assets. The Adviser may, in its discretion, at any
time employ such practice, technique or instrument for one or more funds but not
for all 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 maturity of between one and five years. Within this limitation, the Fund
may not purchase individual securities with effective maturities greater than 10
years . 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 bonds subject to the
alternative minimum tax ("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 Investors Service, Inc. ("Moody's" (Aaa, Aa and A), Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") or Fitch
IBCA ("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 given a certain rating 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 net assets will normally be
invested in municipal securities . Under normal market conditions, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
However, for temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may temporarily invest more than 20% of its assets in taxable
securities during periods which, in the Adviser's opinion, require a defensive
position. A portion of the Fund's income may be subject to regular federal,
state and local income taxes. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in 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 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.
Although there is no current intention to do so, the Fund may invest
more than 25% of its total assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's current intention not to invest in municipal securities
whose investment income is taxable or AMT
2
<PAGE>
bonds. For purposes of the Fund's investment limitation regarding concentration
of investments in any one industry, industrial development or other private
activity, bonds ultimately payable by companies within the same industry will be
considered as if they were issued by issuers in the same industry.
Normally, the Fund invests at least 65% of its net assets in municipal
bonds which are rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their equivalents, or
if unrated, judged by the Adviser to be of comparable quality at the time of
purchase. The Fund will not invest in any debt security rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser. The Fund may, however, invest in a debt security given a certain rating
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 net assets will normally be
invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
However, for temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may temporarily invest more than 20% of its assets in taxable
securities during periods which, in the Adviser's opinion, require a defensive
position. A portion of the Fund's income may be subject to regular federal,
state and local income taxes. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, reverse repurchase agreements, municipal lease
obligations, variable rate demand instruments and when-issued or forward
delivery securities, may purchase warrants to purchase debt securities, and may
also engage in strategic transactions.
General Investment Objectives and Policies of Scudder Managed Municipal Bonds
Scudder Managed Municipal Bonds, a diversified series of Scudder
Municipal Trust, seeks to provide income exempt from regular federal income tax
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
regular federal income taxes, but income may be subject to state and local
income taxes. Ordinarily, the Fund expects that 100% of its portfolio securities
will be in federally tax-exempt securities although a small portion of its
income may be subject to 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 securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio in municipal securities. The Fund has
the flexibility to invest in municipal securities with short-, medium- and
long-term maturities.
The municipal securities in which the Fund may invest are issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their subdivisions, agencies and instrumentalities. The
interest on these securities is exempt from regular federal income tax. These
municipal securities include municipal notes, which are generally used to
provide short-term capital needs and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. The Fund may also invest in
municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued.
Municipal bonds include: general obligation bonds, which are secured by
the issuer's pledge of its faith, credit and taxing power for payment of
principal and interest; revenue bonds; prerefunded bonds; industrial development
and
3
<PAGE>
pollution control bonds. The Fund may also invest in other municipal securities
such as variable rate demand instruments.
Although there is no current intention to do so, the Fund may invest
more than 25% of its total assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's 20% limitation on investing in municipal securities whose
investment income is taxable or AMT bonds and the Fund's current intention not
to invest in municipal securities whose investment income is subject to regular
federal income tax. For purposes of the Fund's investment limitation regarding
concentration of investments in any one industry, industrial development or
other private activity bonds ultimately payable by companies within the same
industry will be considered as if they were issued by issuers in the same
industry.
Normally, the Fund invests at least 65% of its net assets in securities
rated, or issued by an issuer rated, within the three highest quality rating
categories of Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or their
equivalents, or if 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.
Securities must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
For temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may invest more than 20% of its assets in taxable securities to meet
temporary liquidity requirements. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, municipal lease obligations, variable rate demand
instruments and when-issued or forward delivery securities, may purchase
warrants to purchase debt securities, and may also engage in strategic
transactions.
General Investment Objectives and Policies of Scudder High Yield Tax Free Fund
Scudder High Yield Tax Free Fund, a diversified series of Scudder
Municipal Trust, seeks to provide a high level of income exempt from regular
federal income tax.
The Fund will invest at least 50% of its total assets in municipal
bonds rated, at the time of purchase, within the four highest quality rating
categories of Moody's (Aaa, Aa, A or Baa), S&P or Fitch (AAA, AA, A or BBB), or
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 period ended May 31, 1999, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio was rated as
follows: 32% AAA, 9% AA, 9% A , 22% BBB and 28% unrated. 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.
4
<PAGE>
For temporary defensive purposes, the Fund may vary from its investment
policies during periods when the Adviser determines that it is advisable to do
so because of conditions in the securities markets or other economic or
political conditions. During such periods the Fund may temporarily invest up to
100% of its assets in high-quality municipal securities and high-quality
short-term tax-exempt or taxable instruments. It is impossible to accurately
predict how long such alternative strategies may be utilized.
SHYTFF Investments. It is a fundamental policy, which may not be changed without
a vote of shareholders, that at least 80% of the Fund's net assets will normally
be invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio assets in municipal securities, the
interest income from which is, in the opinion of bond counsel, free from regular
federal income tax. These municipal securities are debt obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their subdivisions, agencies and instrumentalities.
Such municipal securities include municipal notes, which are generally used to
provide short-term capital needs, and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes and
construction loan notes.
The Fund may also invest in municipal bonds, which meet longer-term
capital needs and generally have maturities of more than one year when issued.
Municipal bonds include general obligation bonds, revenue bonds, prerefunded
bonds, industrial development and pollution control bonds. General obligation
bonds and notes are secured by the issuer's pledge of its full faith, credit and
taxing power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source. The Fund may also invest in other municipal
securities such as variable rate demand instruments.
Although there is no current intention to do so, the Fund may invest
more than 25% of its total assets in industrial development or other private
activity bonds, subject to the Fund's fundamental investment policies, and also
subject to the Fund's 20% limitation on investing in AMT bonds and the Fund's
current intention not to invest in municipal securities whose investment income
is subject to regular federal income tax. For purposes of the Fund's investment
limitation regarding concentration of investments in any one industry,
industrial development or other private activity bonds ultimately payable by
companies within the same industry will be considered as if they were issued by
issuers in the same industry.
Under normal market conditions, the Fund expects to invest principally
in municipal securities with long-term maturities (i.e., more than 10 years).
The Fund has the flexibility, however, to invest in municipal securities with
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 Bonds. Below investment-grade debt securities (commonly
referred to as "junk bonds"), that is rated Ba and lower by Moody's and BB and
lower by S&P or unrated securities of equivalent quality, in which the Fund may
invest carry a high degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
The lower the ratings of such debt securities, the greater their risks. See the
Appendix to this Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
High yield, high-risk securities are especially subject to adverse
changes in general economic conditions, to changes in the financial condition of
their issuers and to price fluctuations in response to changes in interest
rates. Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have an adverse impact on the value of such
obligations. During an economic downturn or period of rising interest rates,
highly leveraged issues may experience financial stress which could
5
<PAGE>
adversely affect their ability to service their principal and interest payment
obligations. Prices and yields of high yield securities will fluctuate over time
and, during periods of economic uncertainty, volatility of high yield securities
may adversely affect a Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently- issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interests of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
Master/feeder Structure
The Board of Trustees of each Fund (the "Board" or the "Trustees") has
the discretion to retain the current distribution arrangement for the Fund while
investing in a master fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Specialized Investment Techniques Common to the Funds
As discussed below, the following description of investments and
investment techniques is applicable to more than one of the Funds.
Municipal Securities. Municipal Securities are 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.
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Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds, which meet longer term capital
needs and generally have maturities of more than one year when issued, have two
principal classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds, 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 total assets in industrial
development or other private activity bonds, subject to each Fund's fundamental
investment policies, and also subject to each Fund's current intention not to
invest in municipal securities whose investment income is taxable or AMT bonds,
or in the case of SMMB and SHYTFF, subject to the Fund's 20% limitation on
investing in AMT bonds. For the purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, industrial
development or other private activity bonds ultimately payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.
3. Municipal Lease Obligations and Participation Interests. A municipal
lease obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to
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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.
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
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maximum rates set by state law, limit the degree to which interest on such
variable rate demand instruments may fluctuate; to the extent it does, increases
or decreases in value of such variable rate demand notes may be somewhat greater
than would be the case without such limits. Because the adjustment of interest
rates on the variable rate demand instruments is made in relation to movements
of the applicable rate adjustment index, the variable rate demand instruments
are not comparable to long-term fixed interest rate securities. Accordingly,
interest rates on the variable rate demand instruments may be higher or lower
than current market rates for fixed rate obligations of comparable quality with
similar final maturities.
The maturity of the variable rate demand instruments held by the Funds
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
5. General Considerations. An entire issue of Municipal Securities may
be purchased by one or a small number of institutional investors such as one of
the Funds. Thus, the issue may not be said to be publicly offered. Unlike
securities which must be registered under the Securities Act of 1933, as amended
(the "1933 Act") prior to offer and sale unless an exemption from such
registration is available, municipal securities which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for municipal
securities which were not publicly offered initially.
Securities purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of municipal securities which are not General
Obligation Bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal securities whose issuers are located in the same state or
more than 25% of its total assets in municipal securities the security of which
is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; or colleges and
universities. Each Fund may invest more than 25% of its total assets in
municipal securities of one or more of the following types: public housing
authorities; general obligations of states and localities; lease rental
obligations of states and local authorities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or , with the
exception of SLTTFF, 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.
Tax-exempt custodial receipts. Scudder Managed Municipal Bonds may purchase
tax-exempt custodial receipts (the "Receipts") which evidence ownership in an
underlying bond that is deposited with a custodian for safekeeping. Holders of
the Receipts receive all payments of principal and interest when paid on the
bonds. Receipts can be purchased in an offering or from a financial counterparty
(typically an investment banker). To the extent that any Receipt is illiquid, it
is subject to the Fund's limit on illiquid securities.
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,
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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.
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 "IRS") has issued a favorable revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The IRS has
also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be
tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The IRS has subsequently announced
that it will not ordinarily issue advance ruling letters as to the identity of
the true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each of the Funds intends to take the position that it
owns any municipal obligations acquired subject to a Stand-by Commitment and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the IRS will agree with
such position in any particular case. There is no assurance that Stand-by
Commitments will be available to the Funds nor has any of the Funds assumed that
such commitments would continue to be available under all market conditions.
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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 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 upon time and price.
SMTTFF will maintain a segregated account containing cash, U.S. Government
securities and other high grade debt obligations equal in value to its
obligation in connection with outstanding reverse repurchase agreements. Reverse
repurchase agreements are borrowings subject to SMTTFF's investment restrictions
applicable to that activity. The Fund
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will enter into reverse repurchase agreements only when the Adviser believes
that the interest income to be earned from the investment of the proceeds of the
transaction will be greater than the interest expense of the transaction.
Borrowing. As a matter of fundamental policy, 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.
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
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Strategic Transactions involving options require segregation of Fund assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. A Fund is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
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
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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 15% of its net assets in illiquid
securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
A Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require a Fund to hold a
security or instrument which it might otherwise have sold.
A Fund may purchase and sell put options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. A Fund may not purchase options unless the aggregate premiums paid
on all such options held by the Fund at any time does not exceed 20% of its
total assets. 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
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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 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.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets to the extent Fund obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by the Fund will require the Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
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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, short-term debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Illiquid Securities. 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 (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; or (iii) in limited quantities after they have
been held for a specified period of time and other conditions are met pursuant
to an exemption from registration. Issuers of restricted securities may not be
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted
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securities to the public and, in such event, the Fund may be liable to
purchasers of such securities if the registration statement prepared by the
issuer is materially inaccurate or misleading.
Investment Restrictions
The fundamental policies of each Fund set forth below may not be
changed without the approval of a majority of the Fund's outstanding shares. As
used in this Statement of Additional Information, a "majority of the Fund's
outstanding shares" means the lesser of (1) 67% of the shares of such Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of such Fund are present in person or by proxy, or (2) more than 50% of the
outstanding shares of such Fund. Any nonfundamental policy of a Fund may be
modified by the Fund's Trustees without a vote of the Fund's shareholders.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" is
adhered to at the time an investment is made, later change in percentage
resulting from changes in the value or the total cost of a Fund's assets will
not be considered a violation of the restriction.
As a matter of fundamental policy, each Fund may not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities;
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
Additionally, as a matter of fundamental policy, each Fund will:
(8) have at least 80% of its net assets invested in municipal
securities during periods of normal market conditions.
With respect to fundamental policy (8) above, each Fund, with the
exception of Scudder Managed Municipal Bonds, does not consider any investments
in municipal obligations that pay interest subject to the alternative minimum
tax as part of the 80% of the fund's net assets that must be invested in
municipal securities.
The Trustees have voluntarily adopted certain non-fundamental policies
and restrictions which are observed in the conduct of each Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of the shareholders. As a matter of non-fundamental policy, each Fund may not:
(a) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
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(b) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(c) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(d) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(e) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(f) lend portfolio securities in an amount greater than 5% of its
total assets.
The foregoing non-fundamental policies are in addition to policies
otherwise stated in the Prospectus or this Statement of Additional Information.
PURCHASES
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
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, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer 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, MA
02110, 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 the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
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.
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The Fund reserves 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 the Fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. 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 applicable Trust shall have the authority, as
agent of the shareholder, to redeem shares in the account in order to reimburse
the Fund or the principal underwriter for the loss incurred. Net losses on such
transactions which are not recovered from the purchaser will be absorbed by the
principal underwriter. Any net profit on the liquidation of unpaid shares will
accrue to the Fund.
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
New York Stock Exchange, Inc. (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 who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
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
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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.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, each Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by that Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, each Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trusts' management to afford ease of
redemption, certificates will not be issued to indicate ownership in a Fund.
Share certificates now in a shareholder's possession may be sent to the 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
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
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The Board of Trustees of each Trust and the Distributor each has the
right to limit, for any reason, the amount of purchases by, and to refuse to,
sell to any person, and each may suspend or terminate the offering of shares of
the Fund at any time for any reasons.
The Tax Identification Number section of the 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 organizations, certification of exempt status)
will be returned to the investor. The Fund reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
Each Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and 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.
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. Each Trust and the Transfer Agent each reserves the right to suspend
or terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares, and therefore
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such exchange may be subject to backup withholding. (See "TAXES").
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The 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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Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently have the right, automatically without having to
elect it, to redeem by telephone up to $100,000 and have the proceeds mailed to
their address of record. Shareholders may also request by telephone to have the
proceeds mailed or wired to their predesignated bank account. In order to
request wire redemptions by telephone, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section
on the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a 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.
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 requests by telephone (technically a repurchase agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to 15 business
days.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account 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.
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Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A 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.
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 Checkwriting
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
"Checkwriting" procedure.
Checks will be returned by the Custodian if there are insufficient
shares to meet the withdrawal amount. Potential fluctuations in the per share
value of SMTTFF should be considered in determining the amount of the check. An
investor should not attempt to close an account by check, because the exact
balance at the time the check clears will not be known when the check is
written.
Redemption-in-Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. Each
Fund has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which a Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of that Fund at the beginning of the
period.
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
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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 Checkwriting,
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such redemptions may be subject to backup withholding (see "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefor may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted, (c) during which an emergency exists as a result of which disposal
by the Fund involved of securities owned by it is not reasonably practicable or
it is not reasonably practicable for that Fund fairly to determine the value of
its net assets, or (d) during which the SEC by order permits such suspension of
the right of redemption or a postponement of the date of payment or of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUNDS
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Scudder pioneered the no-load concept when it created the nation's
first no-load fund in 1928, and later developed the nation's first family of
no-load mutual funds.
Investors are encouraged to review the fee and expense tables and the
consolidated financial highlights of the Fund's prospectus for more specific
information about the rates at which management fees and other expenses are
assessed.
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is
http://www.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 Prospectuses. Users can fill out new
account forms on-line, order free software, and request literature on funds.
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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.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders that have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income, or distributions from realized capital
gains in additional shares of the same Fund. A change of instructions for the
method of payment must be received by the Fund's transfer agent at least 5 days
prior to a dividend record date. Shareholders may change their dividend option
either by calling 1-800-225-5163 or by sending written instructions to the
Transfer Agent. Please include your account number with your written request.
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.
Reports to Shareholders
Each Fund issues to its respective shareholders annual and semiannual
financial statements (audited annually by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights for that Fund, as the case may
be.
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; a list of Scudder's
funds follows.
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MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
Scudder Government Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series+
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*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder 500 Index Fund
Scudder Real Estate Investment Fund
- ---------------------------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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 Select 1000 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
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
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.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-225-5163.
- ---------------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
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SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to IRS requirements, may be obtained by contacting Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103 or by
calling toll free, 1-800-225-2470. 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.
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.
28
<PAGE>
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
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 , if necessary, and each Fund expects to continue to distribute net
capital gains at least annually. Both types of distributions will be made in
shares of that Fund and confirmations will be mailed to each shareholder unless
a shareholder has elected to receive cash, in which case a check will be sent.
PERFORMANCE INFORMATION
From time to time, quotation of each Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return is the average annual compound rate of
return for the periods of one year, five years and ten years (or such shorter
periods as may be applicable dating from the commencement of the Fund's
operations) all ended on the last day of a recent calendar quarter. If a Fund
has been in existence for less than ten years, the average annual total return
for the life of the Fund is given. Average annual total return quotations
reflect changes in the price of the Fund's shares and assume that all dividends
and capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment, over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
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.
29
<PAGE>
Average Annual Total Return for periods ended May 31, 1999*
<TABLE>
<CAPTION>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder Medium Term Tax Free Fund**+ 3.79% 6.03% 6.89% n/a
Scudder Managed Municipal Bonds 4.04% 6.88% 7.47% n/a
Scudder High Yield Tax Free Fund*** 4.17% 7.55% 7.99% n/a
Scudder Limited Term Tax Free Fund*** 3.79% 5.04% n/a 4.71%^(1)
</TABLE>
* Scudder Medium Term Tax Free Fund, Scudder Managed Municipal Bonds, and
Scudder High Yield Tax Free Fund have each changed their fiscal year end
from December 31 to May 31. For their abbreviated fiscal periods
beginning January 1, 1999 through May 31, 1999, the Funds posted a total
return of - 0.02%, -0.17% and 0.18%, respectively. Over the twelve months
ended May 31, each Fund's total return was 3.79%, 4.04% and 4.17%,
respectively. Scudder Limited Term Tax Free Fund's fiscal year end has
changed from October 31 to May 31. For its abbreviated fiscal period
beginning November 1, 1998, through May 31, 1999, Scudder Limited Term
Tax Free Fund posted a total return of 1.05%. Over the 12 months ended
May 31, the Fund's total return was 3.79%.
** 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 7.09%%.
*** If the Adviser had not maintained Fund expenses and had imposed a full
management fee, total returns for each period would have been lower.
+ 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.
^(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.
30
<PAGE>
Cumulative Total Return for periods ended May 31, 1999
<TABLE>
<CAPTION>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder Medium Term Tax Free Fund* 3.79% 33.99% 94.75% n/a
Scudder Managed Municipal Bonds 4.04% 39.46% 105.46% n/a
Scudder High Yield Tax Free Fund** 4.17% 43.92% 115.64% n/a
Scudder Limited Term Tax Free Fund ** 3.79% 27.84% n/a 27.54%^(1)
</TABLE>
* 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 80.00%.
** 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.
Yields for the 30-day period ended May 31, 1999
Scudder Medium Term Tax Free Fund 3.75%
Scudder Managed Municipal Bonds 4.16%
Scudder High Yield Tax Free Fund 4.46%
Scudder Limited Term Tax Free Fund 3.38%
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.
31
<PAGE>
Tax-Equivalent Yields as of May 31, 1999
TAXABLE EQUIVALENT*
<TABLE>
<CAPTION>
28% 31% 36% 39.6%
FUND Tax Bracket Tax Bracket Tax Bracket Tax Bracket
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Scudder Medium Term Tax Free Fund 5.21% 5.43% 5.86% 6.21%
Scudder Managed Municipal Bonds 5.78% 6.03% 6.50% 6.89%
Scudder High Yield Tax Free Fund 6.19% 6.46% 6.97% 7.38%
Scudder Limited Term Tax Free Fund 4.69% 4.90% 5.28% 5.60%
</TABLE>
* 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.
<TABLE>
<CAPTION>
Federal To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a
Tax Rates Taxable Investment Would Have To Earn*
1998 Taxable Individual
Income Brackets Return 5% 7% 9%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$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%
</TABLE>
* 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 $45,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
32
<PAGE>
There is no guarantee that a fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
As described above, average annual total return, cumulative total
return, total return, yield, and tax-equivalent yield are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Average annual total return, cumulative total return, total return,
yield, and tax-equivalent yield for a Fund will vary based on changes in market
conditions and the level of a Fund's expenses.
Investors should be aware that the principal of each Fund is not
insured.
Comparison of Fund Performance
In connection with communicating its performance to current or
prospective shareholders, a Fund may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, each Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Funds. In addition, the amount of assets that the Adviser has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program.
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.
33
<PAGE>
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds.
ORGANIZATION OF THE FUNDS
Scudder Medium Term Tax Free Fund is a series of Scudder Tax Free
Trust, a Massachusetts business trust established under a Declaration of Trust
dated December 28, 1982, as amended. 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'
prospectuses.
The shares of SMT are issued in separate series, each share of which
represents an equal proportionate interest in that series with each other share
of that series. The Trustees of SMT have the authority to designate additional
series and to designate the relative rights and preferences as between the
different series.
The Trustees of SMT and STFT, in their discretion, may authorize the
division of shares of each of their respective Funds (or shares of a series)
into different classes permitting shares of different classes to be distributed
by different methods. Although shareholders of different classes of a series
would have an interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution. The Trustees have no present intention of taking the
action necessary to effect the division of shares into separate classes (which
under present regulations would require the Funds first to obtain an exemptive
order of the SEC), nor of changing the method of distribution of shares of the
Funds.
Currently, the assets of SMT and STFT received for the issue or sale of
the shares of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such series and constitute the underlying assets of such series. The underlying
assets of each series are segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a share of the
general liabilities of SMT. If a series were unable to meet its obligations, the
assets of all other series may in some circumstances be available to creditors
for that purpose, in which case the assets of such other series could be used to
meet liabilities which are not otherwise properly chargeable to them. Expenses
with respect to any two or more series are to be allocated in proportion to the
asset value of the respective series except where allocations of direct expenses
can otherwise be fairly made. The officers of SMT and STFT, subject to the
general supervision of the Trustees, have the power to determine which
liabilities are allocable to a given series, or which are general or allocable
to two or more series. In the event of the dissolution or liquidation of SMT and
STFT, the holders of the shares of any series are entitled to receive as a class
the underlying assets of such shares available for distribution to shareholders.
Shares of SMT and STFT entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
Pursuant to the approval of a majority of stockholders, the Trustees of
SMT and STFT have the discretion to retain the current distribution arrangement
while investing in a master fund in a master/feeder fund structure if the Board
determines that the objectives of a Fund would be achieved more efficiently
thereby.
34
<PAGE>
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.
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., an investment counsel firm, acts as
investment adviser to the Funds. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc., is one of the most experienced investment
counsel firms in the U.S. It was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. In 1928 it introduced the first no-load mutual fund to the public.
In 1953 the Adviser introduced Scudder International Fund, Inc., the first
mutual fund available in the U.S. investing internationally in securities of
issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On 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.
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, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., 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.,
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 $13 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
35
<PAGE>
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.
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as the Funds. You
should be aware that the Funds are likely to differ from these other mutual
funds in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Funds can be expected to vary from those of the other mutual
funds.
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 approved new investment management agreements
(the "Agreements") with Scudder Kemper, which are substantially identical to the
prior investment management agreements, except for the date of execution and
termination. The agreements became effective September 7, 1998, upon the
termination of the then current investment management agreements and were
approved at a shareholder meeting held on December 15, 1998.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 9, 1999. The Agreements will continue in effect until September 30, 2000.
The Agreements will continue from year to year thereafter only if their
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreements or interested persons of the Adviser or the
Trust, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the 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
36
<PAGE>
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 has agreed to maintain
the annualized expenses at 0.75% of average daily net assets until September 30,
2000. 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. 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. For the year ended
October 31, 1998, the Adviser did not impose a portion of its fee amounting to
$86,875 and the amount imposed aggregated $707,892. For the seven month period
ended May 31, 1999, the Adviser did not impose a portion of its fee amounting to
$42,073 and the fee imposed aggregated $382,490.
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 five month period ended May 31, 1999, the fee imposed
amounted to $1,588,972.
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 five month period
ended May 31, 1999, the fee imposed amounted to $1,547,581.
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. For the five month period ended May
31, 1999, the fee imposed amounted to $1,171,322.
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
37
<PAGE>
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 annualized expense ratio
for the seven month period ended May 31, 1999 was 0.75%. The expense ratios for
SMTTFF for the years ended December 31, 1996, 1997 and 1998 were 0.72%, 0.74%
and 0.72%, respectively. The annualized expense ratio for the five month period
ended May 31, 1999 was 0.72%. The expense ratios of SMMB for the years ended
December 31, 1996, 1997 and 1998 were 0.63%, 0.64% and 0.62%, respectively. The
annualized expense ratio for the five month period ended May 31, 1999 was 0.64%.
Since the Adviser maintained Fund expenses as described above, the expense
ratios for SHYTFF were 0.91%, 0.90% and 0.84% for the years ended December 31,
1996, 1997 and 1998, respectively. The annualized expense ratio for the five
month period ended May 31, 1999 was 83%. 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."
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
38
<PAGE>
investment advisory process. Exceptions to these and other provisions of the
Code of Ethics may be granted in particular circumstances after review by
appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
<S> <C> <C> <C>
Lynn S. Birdsong (53)#* Chairman of the Managing Director of Scudder Senior Vice President
Board and Director Kemper Investments, Inc.
Henry P. Becton, Jr. (56) Trustee President and General Manager, --
125 Western Ave.
Allston, MA 02134
Dawn-Marie Driscoll (52) Trustee Executive Fellow, Center for --
Driscoll Associates Business Ethics, Bentley
4909 SW 9th Place College; President, Driscoll
Cape Coral, FL 33914 Associates (consulting firm)
Peter B. Freeman (67) Trustee Trustee, Eastern Utilities --
100 Alumni Avenue Associates; Director, Swan
Providence, RI 02906 Point Cemetery; Director,
AMICA Mutual Insurance Co.;
Trustee, various non-family
trusts and charitable
institutions; Director, the
A.H. Belo Company
George M. Lovejoy, Jr. (69) Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Suite 543 investment trust)
Boston, MA 02109-4002
Wesley W. Marple, Jr. (67) Trustee Professor of Business --
Northeastern University Administration, Northeastern
413 Hayden Hall University, College of Business
360 Huntington Avenue Administration
Boston, MA 02115
Kathryn L. Quirk*# (46) Trustee, Vice Managing Director of Scudder Senior Vice President,
President and Kemper Investments, Inc. Director and Clerk
Assistant Secretary
Jean C. Tempel (56) Trustee Venture Partner, Internet --
Internet Capital Corp. Capital Corp.
10 Post Office Square
Suite 1325
Boston, MA 02109-4603
Philip G. Condon+ (49) Vice President (1) Managing Director of Scudder Senior Vice President
Kemper Investments, Inc. and Director
Ashton P. Goodfield + (35) Vice President (2) Senior Vice President of Scudder --
Kemper Investments, Inc.
39
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
Ann M. McCreary# (42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John R. Hebble+ (41) Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Caroline Pearson+ (37) Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
John Millette+ (37) Vice President and Assistant Vice President of --
Secretary Scudder Kemper Investments, Inc.
</TABLE>
(1) SMT
(2) STFT
* Mr. Birdsong 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 August 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
9,399,901 shares in the aggregate, or 17.03% of the outstanding shares of SMTTFF
on August 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 August 31, 1999, 5,603,832 shares in the aggregate, 10.15% 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 August 31, 1999, no person owned
beneficially more than 5% of SMTTFF's outstanding shares, except as stated
above.
As of August 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
4,237,271 shares in the aggregate or 52.11% of the outstanding shares of SLTTFF
on August 31, 1999. The Adviser may be deemed to be the beneficial owner of such
shares but disclaims any beneficial ownership in such shares.
40
<PAGE>
As of August 31, 1999, 560,899 shares in the aggregate, 6.89% of the
outstanding shares of SLTTF, 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.
As of August 31, 1999, 442,775 shares in the aggregate, 5.44% of the
outstanding shares of the Fund, were held in the name of Linda B. McKean and
Gordon N. Litwin, P.O. Box 313, Rumson, NJ 07760, 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 August 31, 1999, no person owned
beneficially more than 5% of LTTFF's outstanding shares, except as stated above.
As of August 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.
Certain accounts for which the Adviser acts as investment adviser owned
11,205,549 shares in the aggregate, or 14.43% of the outstanding shares of SMMB
on August 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 August 31, 1999, 4,168,480 shares in the aggregate, 5.36% 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 August 31, 1999, no person owned
beneficially more than 5% of SMMB's outstanding shares except as stated above.
As of August 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.
Certain accounts for which the Adviser acts as investment adviser owned
2,061,249 shares in the aggregate or 6.07% of the outstanding shares of SHYTFF
on August 31, 1999. The Adviser may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
As of August 31, 1999, 2,114,364 shares in the aggregate, 6.23% of the
outstanding shares of SHYTFF were held in the name of National Financial
Services Co., for the exclusive benefit of customers, 200 Liberty Street, 1
World Financial Center, New York, NY 10281-5500, who may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of August 31, 1999, 3,412,149 shares in the aggregate, 10.00% 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 August 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
41
<PAGE>
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 a 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 liaison 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 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 of the Funds also serve as Independent
Trustees of certain other Scudder Funds, which enables them to address
investment and operational issues that are common to many of the Scudder Funds
in a cost-efficient and effective manner. During 1998, the Independent Trustees
participated in 26 meetings of the Funds' board or board committees, which were
held on 21 different days during the year.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1998 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
Scudder Scudder Tax All Scudder
Name Municipal Trust* Free Trust** Funds
---- ---------------- ------------ -----
<S> <C> <C> <C> <C>
Henry P. Becton, Jr., $12,046.42 $12,046.42 $135,000 (28 funds)
Trustee
Dawn-Marie Driscoll, $12,899.96 $12,899.96 $145,000 (28 funds)
Trustee
Peter B. Freeman, $12,143.64 $12,143.64 $172,425 (46 funds)
Trustee
George M. Lovejoy, Jr., $12,046.42 $12,046.42 $148,600 (29 funds)
Trustee
Wesley W. Marple, Jr., $12,046.42 $12,046.21 $135,000 (28 funds)
Trustee
Jean C. Tempel, $12,067.86 $12,067.86 $135,000 (29 funds)
Trustee
</TABLE>
42
<PAGE>
* 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, 2000 and from
year to year thereafter only if their continuance is approved annually by a
majority of the Trustees who are not parties to such agreements or "interested
persons" of any such party and by a vote either of a majority of the Trustees or
a majority of the outstanding voting securities of the relevant Fund. The
underwriting agreement of each Fund was last approved by the Trustees on August
9, 1999.
Under the underwriting agreements, each Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectuses and any amendments
and supplements thereto; the registration and qualification of shares for sale
in the various states, including registering a Fund as a broker/dealer in
various states, as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor), notices, proxy statements,
reports or other communications to shareholders of that Fund; the cost of
printing and mailing confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both that Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of each Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by that Fund, unless a rule 12b-1 plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although each Fund does not currently have a 12b-1 Plan, and
the Trustees have no current intention of adopting one, the
Fund would also pay those fees and expenses permitted to be
paid or assumed by that Fund pursuant to a 12b-1 Plan, if any,
were such a plan adopted by the Fund, notwithstanding any
other provision to the contrary in the underwriting agreement.
As agent, the Distributor currently offers shares of each Fund and
Portfolio on a continuous basis to investors in all states in which the Fund may
from time to time be registered or where permitted by applicable law. Each
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of any Fund.
TAXES
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in the Statement of Additional Information
in light of their particular tax situation.
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and has qualified as such. Each of the Funds intends to continue to so
43
<PAGE>
qualify, in each taxable year as required under the Code in order to avoid
payment of federal income tax at the Fund level.
In order to qualify as a regulated investment company, each Fund must
meet certain requirements regarding the source of its income and the
diversification of its assets.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income and net short-term capital gain in
excess of net long-term capital loss and at least 90 percent of its tax-exempt
net investment income and generally is not subject to federal income tax to the
extent that it distributes annually all of its taxable net investment income and
net realized long-term and short-term capital gains in the manner required under
the Code. Each of the Funds intends to distribute annually all taxable and
tax-exempt net investment income and net realized capital gains in compliance
with applicable distribution requirements and therefore does not expect to pay
federal income tax.
If for any taxable year a Fund does not qualify for special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareholders).
Each of the Funds is subject to a 4% nondeductible excise tax on
amounts of taxable income required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of such Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year as well as amounts that were neither distributed nor taxed to the Fund
during the prior calendar year. (Investment companies with taxable years ending
on November 30 or December 31 may make an irrevocable election to measure the
required capital gain distribution using their actual taxable year.) Although
the Funds' distribution policies should enable them to avoid excise tax
liability, each Fund may retain (and be subject to income or excise tax on) a
portion of its capital gain or other income if it appears to be in the best
interest of such Fund and its shareholders.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward or post-October loss of a Fund from
the prior fiscal year. As of May 31, 1999, SHYTFF had a net tax basis capital
loss carryforward of approximately $3,900,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until May 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 the Funds for reinvestment, requiring
federal income taxes to be paid thereon, the Fund involved will elect to treat
such capital gains as having been distributed to its shareholders. As a result,
shareholders will report such capital gains as long-term capital gains will be
able to claim a proportionate share of federal income taxes paid by that Fund on
such gains as a credit against the shareholder's federal income tax liability,
and will be entitled to increase the adjusted tax basis of the shareholder's
Fund shares by the difference between 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-
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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%
capital gains rate, regardless of the length of time the shares of the Fund
involved have been held by such shareholders. Such distributions are not
eligible for the dividends-received deduction to corporate shareholders of the
Funds. Any loss realized upon the redemption of shares of a Fund within six
months from the date of their purchase will be treated as a long-term capital
loss to the extent of any amounts treated as distributions of long-term capital
gain with respect to such shares. Any short-term capital loss realized upon the
redemption of shares of a Fund within six months from the date of their purchase
will be disallowed to the extent of any tax-exempt dividends received with
respect to such shares. Any loss realized on the redemption of shares of one of
such Funds may be disallowed if shares of the same Fund are purchased (including
shares purchased under the dividend investment plan or the automatic
reinvestment plan) within 30 days before or after such redemption.
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to or increase their
liability under the 20% 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 have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the federal income tax status of all distributions,
including a statement of the percentage of the prior calendar year's
distributions which were designated as tax-exempt, the percentage of such
tax-exempt distributions treated as a tax-preference item for purposes of the
alternative minimum tax, and the source of such distributions on a
state-by-state basis. All distributions of taxable or tax-exempt net investment
income and net realized capital gain, whether received in shares or in cash,
must be reported by each shareholder on his or her federal income tax return.
Dividends and distributions declared in October, November or December to
shareholders as of a record date in such a month will be deemed to have been
received by shareholders in December if paid during January of the following
year. Redemptions of shares including exchanges for shares of another Scudder
fund, may result in tax consequences (gain or loss) to the shareholder and are
also subject to these reporting requirements.
Investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them (to the extent that
such distribution is from taxable income or gain).
All futures contracts and all options on futures contracts written or
purchased will be governed by Section 1256 of the Code. Absent a tax election to
the contrary, gain or loss attributable to the lapse, exercise or closing out of
any such position generally will be treated as 60% long-term and 40% short-term
capital gain or loss, and on the last trading day of the fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e. treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss.
Positions of each Fund, which consist of at least one debt security not
governed by Section 1256 and at least one futures contract or option on a
futures contract governed by Section 1256 which substantially diminishes the
risk of loss with respect to such debt security, will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor their
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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 each Fund may be
subject to backup withholding. If the withholding provisions are applicable, any
such distributions and proceeds, whether distributed in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of each Fund will not be deductible for federal income tax purposes.
Under rules used by the Internal Revenue Service to determine when borrowed
funds are used for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
The Funds have not undertaken any investigation as to the users of the
facilities financed by bonds in their portfolios.
Tax legislation in recent years has included several provisions that
may affect the supply of, and the demand for, tax-exempt bonds, as well as the
tax-exempt nature of interest paid thereon.
It is not possible to predict with certainty the effect of these recent
tax law changes upon the tax-exempt bond market, including the availability of
obligations appropriate for investment, nor is it possible to predict any
additional restrictions that may be enacted in the future. Each Fund will
monitor developments in this area and consider whether changes in its objectives
or policies are desirable.
Shareholders may be subject to state and local taxes on distributions
from each Fund and redemptions of the shares of each Fund. Some states exempt
from the state personal income tax distributions received from a regulated
investment company to the extent such distributions are derived from interest on
obligations issued by such state or its municipalities or political
subdivisions.
Each Fund is organized as a Massachusetts business trust or a series of
such trust and is not liable for any income or franchise tax in The Commonwealth
of Massachusetts provided that each qualifies as a regulated investment company
under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under an applicable income
tax treaty) on amounts constituting ordinary income received by him or her.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations and applicable state and local tax
laws. Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
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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 routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
For each Fund, purchases and sales of fixed-income securities, are
generally placed by the Adviser with primary market makers for these securities
on a net basis, without any brokerage commission being paid by a Fund. Trading
does, however, involve transaction costs. Transactions with dealers serving as
primary market makers reflect the spread between the bid and asked prices.
Purchases of underwritten issues may be made, which will include an underwriting
fee paid to the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Funds. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for a
Fund to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction on account of execution services and
the receipt of research services. The Adviser has negotiated arrangements, which
are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or a Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with broker/dealers on the basis that the
broker/dealer has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of a Fund with issuers, underwriters or
other brokers and dealers. The Distributor will not receive any commission, fee
or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to
the Funds and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Funds, and not all such information is used by the
Adviser in connection with the Funds. Conversely, such information provided to
the Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Funds.
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
The portfolio turnover rate of SMTTFF (defined by the SEC as the ratio
of the lesser of sales or purchases to the monthly average value of such
securities owned during the year, excluding all securities whose remaining
maturates at the time of acquisition were one year or less) for the years ended
December 31, 1997 and 1998 were 13.4% and 10.8%, respectively. For the five
months ended May 31, 1999, the portfolio turnover rate was 12.5% (annualized).
The
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portfolio turnover rates of SLTTFF for the fiscal years ended October 31, 1997
and 1998 were 17.8% and 23.2%, respectively. For the seven months ended May 31,
1999, the portfolio turnover rate was 5.6% (annualized). The portfolio turnover
rates of SMMB for the years ended December 31, 1997 and 1998 were 9.8% and 8.6%,
respectively. For the five months ended May 31, 1999, the portfolio turnover
rate was 13.8% (annualized). The portfolio turnover rates of SHYTFF for the
years ended December 31, 1997 and 1998 were 33.2% and 14.3%, respectively. For
the five months ended May 31, 1999, the portfolio turnover rate was 7.4%
(annualized).
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 of a Fund is determined by
dividing the value of the total assets of the 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.
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.
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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, 160 Federal
Street, Boston, Massachusetts 02110, independent accountants, and given on the
authority of said firm as experts in auditing and accounting .
PricewaterhouseCoopers LLP audits the financial statements of each Fund and
provides other audit, tax and related services.
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 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
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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 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.
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Glossary
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semiannually in amounts equal to one half the annual
interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
(a) Market Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market discount
(premium) is the difference between market price and face value.
(b) Original Issue Discount
An original issue discount is the discount from face value at which the
bond is first offered to the public.
4. Face Value
The value of a bond that appears on the face of the bond, unless the
value is otherwise specified by the issuing company. Face value is
ordinarily the amount the issuing company promises to pay at maturity.
Face value is not an indication of market value.
5. Liquidation
The process of converting securities or other property into cash.
6. Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
7. Municipal Security
Securities issued by or on behalf of states, territories and
possessions of the United States, their political subdivisions,
agencies and instrumentalities and the District of Columbia and other
issuers, the interest from which is, at the time of issuance in the
opinion of bond counsel for the issuers, exempt from federal income
tax, except for the applicability of the alternative minimum tax.
8. Net Asset Value Per Share
The value of each share of each Fund for purposes of sales and
redemptions.
9. Net Investment Income
The net investment income of a Fund is comprised of its interest
income, including accretion of original issue discounts, less
amortization of premiums and expenses paid or accrued computed under
Generally Accepted Accounting Principles (GAAP).
10. Par Value
Par value of a bond is a dollar amount representing the denomination
and assigned value of the bond. It signifies the dollar value on which
interest on the bonds is computed and is usually the same as face value
and maturity value for an individual bond. For example, most bonds are
issued in $1,000 denominations and they have a face value, maturity
value and par value of $1,000. Their market price can of course vary
significantly from $1,000 during their life between issuance and
maturity.
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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.
Each Fund has a taxable year ending May 31.
Portfolio securities of each Fund and each series of SMT are held
separately, pursuant to a custodian agreement, by the Funds' custodian, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02101.
The firm of Willkie Farr & Gallagher is legal counsel for each Fund.
The name "Scudder Tax Free Trust" is the designation of the Trustees
for the time being under an Amended and Restated Declaration of Trust dated
December 8, 1987 and the name "Scudder Municipal Trust" is the designation of
the Trustees for the time being under an Amended and Restated Declaration of
Trust dated December 11, 1987, each as amended from time to time, and all
persons dealing with a Fund must look solely to the property of that Fund for
the enforcement of any claims against that Fund as neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of a Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by a Fund's Declaration of Trust, as amended from
time to time. The Declaration of Trust of each Fund is on file at the
Massachusetts Secretary of State's Office in Boston, Massachusetts. All persons
dealing with a Fund must look only to the assets of that Fund for the
enforcement of any claims against such Fund as no other series of a Trust
assumes any liabilities for obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes each
Fund's net asset value. SLTTFF, SMTTFF, SMMB and SHYTFF pay SFAC an annual fee
equal to 0.024% of the first $150 million of average daily net assets, 0.0070%
of such assets in excess of $150 million, 0.0040% of such assets in excess of $1
billion, plus holding and transaction charges for this service. The amount
charged by SFAC to SLTTFF for the fiscal year ended October 31, 1996 amounted to
$39,722. The amount charged by SFAC to SLTTFF for the fiscal year ended October
31, 1997 amounted to $38,322. The amount charged by SFAC to SLTTFF for the
fiscal year ended October 31, 1998 amounted to $40,937. For the seven month
period ended May 31, 1999, the amount charged to SLTTFF by SFAC aggregated
$18,697, of which $3,000 was unpaid at May 1, 1999. 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. For the five month period ended May 31, 1999, the
amount charged by SFAC to each Fund aggregated $38,815, $40,520 and $30,972, of
which $7,681, $8,079 and $6,308 was unpaid at May 31, 1999, respectively.
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
52
<PAGE>
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 by Service Corporation
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 by Service Corporation to
SHYTFF for the year ended December 31, 1997. $382,526 was charged by Service
Corporation to SMTTFF for the year ended December 31, 1997. For SLTTFF for the
year ended October 31, 1997, Service Corporation imposed an aggregated fee of
$46,003. A total of $316,492 was charged by Service Corporation to SMMB for the
calendar year ended December 31, 1998. A total of $312,600 was charged by
Service Corporation to SHYTFF for the year ended December 31, 1998. $347,239 was
charged by Service Corporation to SMTTFF for the year ended December 31, 1998.
For SLTTFF for the year ended October 31, 1998, Service Corporation imposed an
aggregated fee of $40,937. A total of $125,396 was charged by Service
Corporation to SMMB for the five month period ended May 31, 1999, of which
$24,833 was unpaid at May 31, 1999. A total of $127,716 was charged by Service
Corporation to SHYTFF for the five month period ended May 31, 1999, of which
$25,498 was unpaid at May 31, 1999. A total of $135,451 was charged by Service
Corporation to SMTTFF for the five month period ended May 31, 1999, of which
$26,604 was unpaid at May 31, 1999. For SLTTFF for the seven month period ended
May 31, 1999, Service Corporation imposed an aggregated fee of $24,095, of which
$3,300 was unpaid at May 31, 1999.
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' prospectuses and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which each Trust has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statements and their
amendments for further information with respect to the Funds and the securities
offered hereby. The Registration Statements and their amendments are available
for inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder 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 to the Annual Report to the Shareholders of the Fund dated May 31,
1999 and are hereby deemed to be part of this Statement of Additional
Information.
Scudder Medium Term Tax Free Fund
The financial statements, including the investment portfolio, of
Scudder Medium Term Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference to the Annual Report to the Shareholders of the Fund
dated May 31, 1999 and are hereby deemed to be part of this Statement of
Additional Information.
Scudder Managed Municipal Bonds
The financial statements, including the investment portfolio, of
Scudder Managed Municipal Bonds, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference to the Annual Report to the Shareholders of the Fund
dated May 31, 1999 and are hereby deemed to be part of this Statement of
Additional Information.
53
<PAGE>
Scudder High Yield Tax Free Fund
The financial statements, including the investment portfolio, of
Scudder High Yield Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference to the Annual Report to the Shareholders of the Fund
dated May 31, 1999 and are hereby deemed to be part of this Statement of
Additional Information.
54
<PAGE>
SCUDDER TAX FREE TRUST
PART C. OTHER INFORMATION
Item 23. Exhibits.
- -------- ---------
(a) (1) Amended and Restated Declaration of Trust,
dated December 8, 1987, is 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, is 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, is
incorporated by reference to Post-Effective
Amendment No. 27 to the Registration
Statement.
(4) Redesignation of Series, dated October 9,
1990, is incorporated by reference to
Post-Effective Amendment No. 27 to the
Registration Statement.
(b) (1) By-laws, dated December 28, 1982, is
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 is 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 is 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,
is 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,
is 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, is
incorporated by reference to Post-Effective
Amendment No. 30 to the Registration
Statement.
(f) Inapplicable.
(g) (1) Custodian Contract with State Street Bank
and Trust Company ("State Street Bank"),
dated April 12, 1983, is 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, is incorporated by reference
to Post-
<PAGE>
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, is incorporated by
reference to Post-Effective Amendment No. 27
to the Registration Statement.
(4) Fee schedule for Exhibit (g)(1) is
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, is
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, is 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, is
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, is 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 is 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, is
incorporated by reference to Post-Effective
Amendment No. 27 to the Registration
Statement.
(2) Fee schedule for Exhibit (h)(1) is
incorporated by reference to Post-Effective
Amendment No. 27 to the Registration
Statement.
(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, is 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, is incorporated by reference to
Post-Effective Amendment No. 21 to the
Registration Statement.
(i) Opinion of Counsel is filed herein.
(j) Consent of Independent Accountants is filed
herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
2
<PAGE>
(n) Inapplicable.
(o) Inapplicable.
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1 - 4.3 of the Registrant's Declaration
of Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
3
<PAGE>
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to
a Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by a
Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may
be insured against by policies maintained by the Trust, shall
be severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall insure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a
defense to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section 4.3 may
be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under this Section
4.3, provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is not (i) an
"Interested Person" of the Trust (including anyone who has been exempted from
being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser.
- -------- ----------------------------------------------------
4
<PAGE>
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.**
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.**
5
<PAGE>
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 Financial Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 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 Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
6
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant
Two International Place Treasurer None
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President Assistant Secretary
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant
345 Park Avenue Clerk None
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
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Senior Vice President &
Two International Place Assistant 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
Kathryn L. Quirk Director, Senior Vice President, Chief Director, Vice President &
345 Park Avenue Legal Officer and Assistant Clerk Assistant Secretary
New York, NY 10154
7
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
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
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor
Services, Inc. None None None None
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
8
<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 27th day of September, 1999.
SCUDDER TAX FREE TRUST
By /s/John Millette
----------------
John Millette,
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/Lynn Birdsong
- --------------------------------------
Lynn Birdsong* President (Principal Executive September 27, 1999
Officer) and Trustee
/s/Henry P. Becton, Jr.
- --------------------------------------
Henry P. Becton, Jr. Trustee September 27, 1999
/s/Dawn-Marie Driscoll
- --------------------------------------
Dawn-Marie Driscoll* Trustee September 27, 1999
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman Trustee September 27, 1999
/s/George M. Lovejoy, Jr.
- --------------------------------------
George M. Lovejoy, Jr.* Trustee September 27, 1999
/s/Wesley W. Marple, Jr.
- --------------------------------------
Wesley W. Marple, Jr.* Trustee September 27, 1999
/s/Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk* Vice President and Trustee September 27, 1999
/s/Jean C. Tempel
- --------------------------------------
Jean C. Tempel* Trustee September 27, 1999
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and September 27, 1999
Accounting Officer)
</TABLE>
*By: /s/Caroline Pearson
-------------------
Caroline Pearson,
Attorney-in-fact pursuant to powers of attorney
included with the signature pages of Post-Effective
Amendment No. 32 to the Registration Statement
filed July 19, 1999
<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. 33
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 33
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER TAX FREE TRUST
<PAGE>
SCUDDER TAX FREE TRUST
EXHIBIT INDEX
(i)
(j)
Exhibit (i)
September 27, 1999
Scudder Tax Free Trust
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 33 to Registration Statement
(Securities Act File No. 2-81105; Investment Company Act
File No. 811-3632)
---------------------------------------------------------
Ladies and Gentlemen:
You have requested us, as counsel to Scudder Tax Free Trust (the "Trust"), a
business trust organized under the laws of the Commonwealth of Massachusetts, to
furnish you with this opinion in connection with the Trust's filing of
Post-Effective Amendment No. 33 to its Registration Statement on Form N-1A (the
"Amendment").
As to the various questions of fact material to the opinion expressed herein we
have relied upon and assumed the genuineness of the signatures on, the
conformity to originals of, and the authenticity of, all documents, including
but not limited to certificates of officers of the Trust, submitted to us as
originals or copies, which facts we have not independently verified. We have
also examined such other records, documents, papers, statutes and authorities as
we have deemed necessary to form a basis for the opinion hereinafter expressed.
Capitalized terms used herein but not otherwise defined have the meanings
ascribed to them in the Amendment.
Based on the foregoing, we are of the opinion that the shares of beneficial
interest of the Trust, when duly sold, issued and paid for in accordance with
the laws of applicable jurisdictions and the terms of the Trust's Prospectus and
Statement of Additional Information included as part of the Amendment, and
assuming at the time of sale such shares will be sold at a sales price in each
case in excess of their par value, will be valid, legally issued, fully paid and
non-assessable. We note, however, that shareholders of a Massachusetts business
trust may under certain circumstances be subject to assessment at the instance
of creditors to pay the obligations of such trust in the event that its assets
are insufficient for the purpose.
<PAGE>
Scudder Tax Free Trust
September 27, 1999
Page 2
We are members of the Bar of the State of New York and do not hold ourselves out
as being conversant with the laws of any jurisdiction other than those of the
United States of America and the State of New York. We note that we are not
licensed to practice law in the Commonwealth of Massachusetts, and to the extent
that any opinion expressed herein involves the law of the Commonwealth of
Massachusetts, such opinion should be understood to be based solely upon our
review of the documents referred to above, the published statutes of the
Commonwealth of Massachusetts, and where applicable, published cases, rules or
regulations of regulatory bodies of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the Amendment.
Very truly yours,
/s/Willkie Farr & Gallagher
2
Exhibit (J)
[LOGO]
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. 33 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 July 1, 1999 and July
19, 1999, on the financial statements and financial highlights appearing in the
May 31, 1999 Annual Reports to the Shareholders of Scudder Limited Term Tax Free
Fund and Scudder Medium Term Tax Free Fund, respectively, which are also
incorporated by reference into the Registration Statement. We further consent to
the references to our Firm under the heading "Financial Highlights," in the
Prospectus and "Experts" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 27, 1999
