Filed electronically with the Securities and Exchange Commission
on October 30, 2000
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. 36 /_X_/
--
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 36 /_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)
/___/ On __________________ pursuant to paragraph (b)
/_X_/ On December 29, 2000 pursuant to paragraph (a) (1)
/___/ On __________________ pursuant to paragraph (a) (2) of Rule 485.
If Appropriate, check the following box:
/___/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
SCUDDER
INVESTMENTS(SM)
[LOGO]
December 29, 2000
Prospectus
--------------------------------------------------------------------------------
Scudder Medium Term Tax Free Fund
Advisor Classes A, B, and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder Medium Term Tax Free Fund
How the fund works
4 Investment Approach
5 Main Risks to Investors
6 The Fund's Track Record
7 How Much Investors Pay
8 Other Policies and Risks
9 Who Manages and Oversees the Fund
How to invest in the fund
12 Choosing a Share Class
17 How to Buy Shares
18 How to Exchange or Sell Shares
19 Policies You Should Know About
25 Understanding Distributions and Taxes
<PAGE>
How the fund works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class A: 00000
| Class B: 00000
| Class C: 00000
Scudder Medium Term Tax Free Fund
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Investment Approach
The fund seeks a high level of income free from regular federal income taxes and
seeks to limit principal fluctuation. The fund invests at least 80% of net
assets in securities of municipalities across the United States and in other
securities whose income is free from regular federal income tax and alternative
minimum tax (AMT).
The fund can buy many types of municipal securities with maturities of 15 years
or less. These may include revenue bonds (which are backed by revenues from a
particular source) and general obligation bonds (which are typically backed by
the issuer's ability to levy taxes), as well as municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it between
five and ten years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 65% of net assets in municipal securities of
the top three grades of credit quality.
The fund could put up to 35% of net assets in bonds rated in the fourth credit
grade, which is still considered investment-grade.
4
<PAGE>
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[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.
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Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. The fund's focus on intermediate-term
bonds should reduce the effect of this risk somewhat, but will not eliminate it.
Changes in interest rates will also affect the fund's yield: when rates fall,
fund yield tends to fall as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may focus on investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could invest in illiquid municipal lease
obligations, which are more likely to default or to become difficult to sell
because they carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
o political or legal actions could change the way the fund's dividends
are taxed
5
<PAGE>
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[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
Performance figures for Class A, B and C shares are derived from the historical
performance of Class S shares, adjusted to reflect the operating expenses
applicable to Class A, B and C shares, which may be higher or lower than those
of Class S shares. Class S shares are offered in a separate prospectus and are
invested in the same portfolio as Class A, B and C shares. The bar chart shows
how these performance figures for the fund's Class A shares have varied from
year to year, which may give some idea of risk. The table shows how these
performance figures for the fund's Class A, B and C shares compare with a broad
based market index (which, unlike the fund, has no fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
1999 00.00
2000 Total Return as of September 30: ___%
Best Quarter: Worst Quarter:
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Class A
------------------------------------------------------------------------
Class B
------------------------------------------------------------------------
Class C
------------------------------------------------------------------------
Index
------------------------------------------------------------------------
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.
The performance figures shown in the table are also adjusted to reflect the
maximum sales charge of [__]% for Class A shares and the maximum contingent
deferred sales charge of [_]% for Class B shares and [_]% for Class C shares.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) [__%] None None
------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as a % of redemption
proceeds) None* [__%] [__%]
------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
------------------------------------------------------------------------
Management Fee % % %
------------------------------------------------------------------------
Distribution (12b-1) Fee % % %
------------------------------------------------------------------------
Other Expenses** % % %
------------------------------------------------------------------------
Total Annual Operating Expenses % % %
------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50%
if redeemed during the second year following purchase.
** Includes a fixed rate administrative fee of ___%.
------------------------------------------------------------------------
Expense Example
------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------
Class A shares $ $ $ $
------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------
Class A shares $ $ $ $
------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------
7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
However, the policy of investing at least 80% of net assets in
municipal securities for the fund cannot be changed without shareholder
approval.
o As a temporary defensive measure, the fund could shift up to 100% of
its assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality declines, the security will
usually be sold unless the adviser believes this would not be in the
shareholders' best interests.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
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[ICON] Scudder Kemper, the company with overall responsibility for managing
the fund, takes a team approach to asset management.
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Who Manages and Oversees the Fund
The investment adviser
The fund's investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from the fund. For the 12 months through the most recent fiscal
year end, the actual amount the fund paid in management fees was __% of its
average daily net assets.
The fund has entered into a new investment management agreement with Scudder
Kemper. The table below describes the new fee rates for the fund.
---------------------------------------------------------------------------
Investment Management Fee
---------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
---------------------------------------------------------------------------
first $500 million 0.60%
---------------------------------------------------------------------------
next $500 million 0.50%
---------------------------------------------------------------------------
more than $1 billion 0.475%
---------------------------------------------------------------------------
The portfolio managers
The following people handle the day-to-day management of the fund.
Ashton P. Goodfield Philip G. Condon
Co-Lead Portfolio Manager Co-Lead Portfolio Manager
o Began investment career in 1986 o Began investment career
o Joined the adviser in 1986 in 1978
o Joined the fund team in 1990 o Joined the adviser in 1983
o Joined the fund team in 1998
9
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that the fund is
managed in the best interests of its shareholders.
The following people comprise the fund's Board.
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder o President, Doris Duke
Kemper Investments, Inc. Charitable Foundation
o President of the fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President, WGBH Educational
Foundation Jean C. Tempel
o Managing Director, First
Dawn-Marie Driscoll Light Capital, LLC (venture
o Executive Fellow, Center for capital firm)
Business Ethics, Bentley College
o President, Driscoll Associates Steven Zaleznick
(consulting firm) o President and Chief Executive
Officer, AARP Services, Inc.
Edgar Fiedler
o Senior Fellow and Economic
Counsellor, The Conference
Board, Inc. (not-for-profit
business research organization)
Keith R. Fox
o General Partner, The Exeter
Group of Funds
10
<PAGE>
How to invest in the fund
The following pages tell you about many of the services, choices and
benefits of being a shareholder. You'll also find information on how to
check the status of your account using the method that's most
convenient for you.
You can find out more about the topics covered here by speaking with
your financial representative or a representative of your workplace
retirement plan or other investment provider.
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
other classes of shares separately. Each class has its own fees and expenses,
offering you a choice of cost structures. Class A, Class B and Class C shares
are intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Classes and features Points to help you compare
-------------------------------------------------------------------------------------
Class A
<S> <C>
o Sales charges of up to [___%], charged o Some investors may be able to reduce
when you buy shares or eliminate their sales charges;
see next page
o In most cases, no charges when you sell
shares o Total annual operating expenses are
lower than those for Class B or
Class C
-------------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge declining from
[___%], charged when you sell shares you o Shares automatically convert to
bought within the last six years Class A after six years, which means
lower annual expenses going forward
o [___%] distribution fee
-------------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never convert
o Deferred sales charge of [___%], charged to Class A, so annual expenses
when you sell shares you bought within remain higher
the last year
o [___%] distribution fee
-------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class A shares may make sense for long-term investors, especially those
who are eligible for reduced or eliminated sales charges.
--------------------------------------------------------------------------------
Class A shares
Class A shares do have a 12b-1 plan, under which a distribution fee
of [--%] is deducted from fund assets each year. Class A shares
have a sales charge that varies with the amount you invest:
Sales charge as a % of Sales charge as % of
Your investment offering price your net investment
-------------------------------------------------------------------
Up to $100,000 % %
-------------------------------------------------------------------
$100,000-$249,999
-------------------------------------------------------------------
$250,000-$499,999
-------------------------------------------------------------------
$500,000-$999,999
-------------------------------------------------------------------
$1 million or more See below and next page
-------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $100,000 over the next 24 months
("letter of intent")
o the amount of shares you already own (including shares in
certain other funds) plus the amount you're investing now is at
least $100,000 ("cumulative discount")
o you are investing a total of $100,000 or more in several funds
at once ("combined purchases")
The point of these three features is to let you count investments
made at other times for purposes of calculating your present sales
charge. Any time you can use the privileges to "move" your
investment into a lower sales charge category in the table above,
it's generally beneficial for you to do so. You can take advantage
of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
13
<PAGE>
You may be able to buy Class A shares without sales charges when
you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you
pay a fee to an investment adviser or other firm for portfolio
management services
There are a number of additional provisions that apply in order to
be eligible for a sales charge waiver. The fund may waive the sales
charges for investors in other situations as well. Your financial
representative or Shareholder Services can answer your questions
and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or
through one of the sales charge reduction features described on the
previous page, you may be eligible to buy Class A shares without
sales charges. However, you may be charged a contingent deferred
sales charge (CDSC) of 1.00% on any shares you sell within the
first year of owning them, and a similar charge of 0.50% on shares
you sell within the second year of owning them. This CDSC is waived
under certain circumstances (see "Policies You Should Know About").
Your financial representative or Shareholder Services can answer
your questions and help you determine if you're eligible.
14
<PAGE>
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[ICON] Class B shares can be a logical choice for long-term investors who
would prefer to see all of their investment go to work right away, and
can accept somewhat higher annual expenses in exchange.
--------------------------------------------------------------------------------
Class B shares
With Class B shares, you pay no up-front sales charges to the fund.
Class B shares do have a 12b-1 plan, under which a distribution fee
of [___%] is deducted from fund assets each year. This means the
annual expenses for Class B shares are somewhat higher (and their
performance correspondingly lower) compared to Class A shares.
After six years, Class B shares automatically convert to Class A,
which has the net effect of lowering the annual expenses from the
seventh year on.
Class B shares have a CDSC. This charge declines over the years you
own shares, and disappears completely after six years of ownership.
But for any shares you sell within those six years, you may be
charged as follows:
Year after you bought shares CDSC on shares you sell
-------------------------------------------------------------------
First year %
-------------------------------------------------------------------
Second or third year
-------------------------------------------------------------------
Fourth or fifth year
-------------------------------------------------------------------
Sixth year
-------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
-------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You
Should Know About"). Your financial representative or Shareholder
Services can answer your questions and help you determine if you're
eligible.
While Class B shares don't have any front-end sales charges, their
higher annual expenses mean that over the years you could end up
paying more than the equivalent of the maximum allowable front-end
sales charge.
15
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class C shares may appeal to investors who plan to sell some or all
shares within six years of buying them, or who aren't certain of their
investment time horizon.
--------------------------------------------------------------------------------
Class C shares
Like Class B shares, Class C shares have no up-front sales charges.
However, Class C shares do have a 12b-1 plan under which a
distribution fee of [___%] is deducted from fund assets each year.
Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class
A shares (and the performance of Class C shares is correspondingly
lower than that of Class A).
Unlike Class B shares, Class C shares do NOT automatically convert
to Class A after six years, so they continue to have higher annual
expenses.
Class C shares have a CDSC, but only on shares you sell within one
year of buying them:
Year after you bought shares CDSC on shares you sell
-------------------------------------------------------------------
First year %
-------------------------------------------------------------------
Second year and later None
-------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You
Should Know About"). Your financial representative or Shareholder
Services can answer your questions and help you determine if you're
eligible.
While Class C shares don't have any front-end sales charges, their
higher annual expenses mean that over the years you could end up
paying more than the equivalent of the maximum allowable front-end
sales charge.
16
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
First investment Additional investments
-------------------------------------------------------------------------------------
<S> <C>
$[___] or more for regular accounts $100 or more for regular accounts
$[___] or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
-------------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative using
method that's most convenient for you the method that's most convenient
for you
-------------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check made out to "Kemper
Funds" and an investment slip to us
o Send it to us at the appropriate address, at the appropriate address below
along with an investment check
o If you don't have an investment
slip, simply include a letter
with your name, account number,
the full name of the fund and the
share class and your investment
instructions
-------------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
-------------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for instructions
-------------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments, call
(800) 621-1048
-------------------------------------------------------------------------------------
On the Internet
-- o Go to www.kemper.com and register
o Follow the instructions for buying
shares with money from your bank
account
-------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[ICON] Regular mail:
Kemper Funds, PO Box 219415, Kansas City, MO 64121-9415
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
--------------------------------------------------------------------------------
17
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
-------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
-------------------------------------------------------------------------------------
$[___] or more to open a new account Some transactions, including most for
($[___] for IRAs) over $50,000, can only be ordered in
writing with a signature guarantee; if
$100 or more for exchanges between you're in doubt, see page 21
existing accounts
-------------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the method o Contact your representative by the
that's most convenient for you method that's most convenient for you
-------------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
-------------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number you're o the fund, class and account number
exchanging out of from which you want to sell shares
o the dollar amount or number of shares you o the dollar amount or number of
want to exchange shares you want to sell
o the name and class of the fund you want o your name(s), signature(s) and
to exchange into address, as they appear on your
account
o your name(s), signature(s) and address,
as they appear on your account o a daytime telephone number
o a daytime telephone number
-------------------------------------------------------------------------------------
With a systematic exchange plan
o To set up regular exchanges from a fund --
account, call (800) 621-1048
-------------------------------------------------------------------------------------
With a systematic withdrawal plan
-- o To set up regular cash payments from
a fund account, call (800) 621-1048
-------------------------------------------------------------------------------------
On the Internet
o Go to www.kemper.com and register --
o Follow the instructions for making
on-line exchanges
-------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 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 Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
19
<PAGE>
Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. However, wire transactions that arrive by
12:00 noon Eastern time will receive that day's dividend. When selling shares,
you'll generally receive the dividend for the day on which your shares were
sold. The level of income dividends will vary from one class to another based on
a class's fees and expenses.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
Checkwriting lets you sell shares of the fund by writing a check. Your
investment keeps earning dividends until your check clears. Please note that you
should not write checks for less than $100, and that we can't honor any check
larger than your balance at the time the check is presented to us. It's not a
good idea to close out an account using a check because the account balance
could change between the time you write the check and the time it is presented.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $1,000 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
20
<PAGE>
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns
of excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of
the investment notifies Kemper Distributors that the dealer waives the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Shareholder Services can answer your questions and help you determine if you are
eligible.
21
<PAGE>
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Shareholder Services or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
22
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[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
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How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
-------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
23
<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 you have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
24
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund has a regular schedule for paying out any earnings to shareholders:
o Income dividends: declared daily and paid monthly
o Short-term and long-term capital gains: November or December, or
otherwise as needed
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
Dividends from the fund are generally free from federal income tax for most
shareholders. However, there are a few exceptions:
o a portion of the fund's dividends may be taxable as ordinary income if
it came from investments in taxable securities
o because the fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may
owe taxes on a portion of your dividends if you are among those
investors who must pay AMT
25
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
26
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Scudder or the SEC (see below). If you're a shareholder and have
questions, please contact Scudder. Materials you get from Scudder are free;
those from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.scudder.com
Tel (800) 621-1048
--------------------------------------------------------------------------------
SEC File Number
Scudder Medium Term Tax Free Fund 811-3632
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Medium Term Tax Free Fund (Class A, B and C Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B and Class C Shares (the
"Shares") of Scudder Medium Term Tax Free Fund (the "Fund"), a diversified
series of Scudder Tax Free Trust (the "Trust"), an open-end management
investment company. It should be read in conjunction with the prospectus of the
Shares dated December 29, 2000. The prospectus may be obtained without charge
from the Fund at the address or telephone number on this cover or the firm from
which this Statement of Additional Information was received.
Scudder Medium Term Tax Free Fund offers the following classes of shares:
Class S, Class AARP, Class A, Class B and Class C shares (the "Shares"). Only
Class A, Class B and Class C shares of Scudder Medium Term Tax Free Fund are
offered herein.
TABLE OF CONTENTS
Investment Restrictions........................................................2
Investment Policies and Techniques.............................................4
Dividends, Distributions and Taxes............................................19
Performance...................................................................22
Investment Manager and Underwriter............................................27
Portfolio Transactions........................................................32
Net Asset Value...............................................................33
Purchase, Repurchase and Redemption of Shares.................................34
Purchase of Shares............................................................34
Redemption or Repurchase of Shares............................................39
Special Features..............................................................43
Officers and Trustees.........................................................46
Shareholder Rights............................................................50
Scudder Kemper Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's May 31, 2000 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund accompanies this document.
<PAGE>
INVESTMENT RESTRICTIONS
The 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 AMT as part of the 80%
of the fund's net assets that must be invested in municipal securities.
The Trustees have voluntarily adopted certain non-fundamental policies and
restrictions which are observed in the conduct of each Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of the shareholders. As a matter of non-fundamental policy, each Fund may not:
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<PAGE>
(a) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(b) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;
(c) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(d) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(e) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value); and
(f) lend portfolio securities in an amount greater than 5% of its total
assets.
The foregoing non-fundamental policies are in addition to policies
otherwise stated in the Prospectus or this Statement of Additional Information.
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC that permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow
3
<PAGE>
from a bank at a higher interest rate if an interfund loan is called or not
renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional costs. The program is subject to the
oversight and periodic review of the Boards of the participating funds. To the
extent the Fund is actually engaged in borrowing through the interfund lending
program, the Fund, as a matter of non-fundamental policy, may not borrow for
other than temporary or emergency purposes (and not for leveraging), except that
the Fund may engage in reverse repurchase agreements and dollar rolls for any
purpose.
INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise indicated, the Fund's objectives and policies are not
fundamental and may be changed without a shareholder vote. There can be no
assurance that a Fund will achieve its objective. If there is a change in a
Fund's investment objective, shareholders should consider whether that Fund
remains an appropriate investment in light of their then current financial
position and needs.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as short
selling, hedging, etc.) or a financial instrument in which the Fund may purchase
(such as options, forward foreign currency contracts, etc.) are meant to
describe the spectrum of investments that Scudder Kemper Investments, Inc. (the
"Adviser"), in its discretion, might, but is not required to, use in managing a
Fund's portfolio assets. The Adviser may, in its discretion, at any time employ
such practice, technique or instrument for one or more funds but not for all
funds advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have a
material impact on that Fund's performance.
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.
General Investment Objectives and Policies of Scudder Medium Term Tax Free Fund
The Fund will invest primarily in high-grade, intermediate-term municipal
bonds. The dollar-weighted average maturity of the Fund's portfolio generally
will range between five and 10 years. Within this limitation, the Fund may not
purchase individual securities with effective maturities greater than 15 years.
To the extent the Fund invests in high-grade securities, it will be unable to
avail itself of opportunities for higher income which may be available with
lower-grade investments.
All income distributed by the Fund is expected to be exempt from regular
federal income tax. Ordinarily, the Fund expects that 100% of its portfolio
securities will be in federally tax-exempt securities although a small portion
of its income may be subject to federal or AMT.
The Fund's Investments. It is a fundamental policy, which may not be changed
without a vote of shareholders, that at least 80% of the Fund's net assets will
normally be invested in municipal securities. The municipal securities in which
the Fund may invest are debt obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their subdivisions, agencies and instrumentalities, the interest on which is
exempt from federal income tax. Such municipal securities include municipal
notes, which are generally used to provide short-term capital needs and have
maturities of one year or less. Municipal notes include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes and Construction Loan Notes.
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.
4
<PAGE>
Although there is no current intention to do so, the Fund may invest more
than 25% of its total assets in industrial development or other private activity
bonds, subject to the Fund's fundamental investment policies, and also subject
to the Fund's current intention not to invest in municipal securities whose
investment income is taxable or alternative minimum tax (AMT) bonds. For
purposes of the Fund's investment limitation regarding concentration of
investments in any one industry, industrial development or other private
activity, bonds ultimately payable by companies within the same industry will be
considered as if they were issued by issuers in the same industry.
Normally, the Fund invests at least 65% of its net assets in municipal
bonds which are rated within the three highest quality rating categories of
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa and A), Standard & Poor's
Ratings Services ("S&P") or Fitch Investors Service, Inc. ("Fitch") (AAA, AA and
A) or their equivalents, or if not rated, judged by the Adviser to be of
comparable quality at the time of purchase. The Fund will not invest in any debt
security rated lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent
quality as determined by the Adviser. The Fund may, however, invest in a debt
security given a certain rating by one rating agency even though one or more of
the other agencies may rate the security lower. Securities must also meet credit
standards applied by the Adviser. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of the Fund's net assets will normally be
invested in municipal securities. Under normal market conditions, the Fund
expects to invest 100% of its portfolio securities in municipal securities.
However, for temporary defensive purposes or if an unusual disparity between
after-tax income on taxable and municipal securities makes it advisable, up to
20% of the Fund's assets may be held in cash or invested in short-term taxable
investments, including U.S. Government obligations and money market instruments.
The Fund may temporarily invest more than 20% of its assets in taxable
securities during periods, which, in the Adviser's opinion, require a defensive
position. A portion of the Fund's income may be subject to regular federal,
state and local income taxes. It is impossible to predict how long such
alternative strategies may be utilized.
The Fund may also invest in stand-by commitments and other puts,
repurchase agreements, reverse repurchase agreements, municipal lease
obligations, variable rate demand instruments and when-issued or forward
delivery securities, may purchase warrants to purchase debt securities, and may
also engage in strategic transactions.
Risk Factors
High Yield, High Risk Bonds. Below investment-grade debt securities (commonly
referred to as "junk bonds"), that are rated Ba and lower by Moody's and BB and
lower by S&P or not rated securities of equivalent quality, in which the Fund
may invest carry a high degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
The lower the ratings of such debt securities, the greater their risks. See the
Glossary to this Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
High yield, high-risk securities are especially subject to adverse change
in general economic conditions, to changes in the financial condition of their
issuers and to price fluctuations in response to changes in interest rates.
Economic downturns may disrupt the high yield market and impair the ability of
issuers to repay principal and interest. Also, an increase in interest rates
would likely have an adverse impact on the value of such obligations. During an
economic downturn or period of rising interest rates, highly leveraged issues
may experience financial stress which could adversely affect their ability to
service their principal and interest payment obligations. Prices and yields of
high yield securities will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely affect a Fund's
net asset value. In addition, investments in high yield zero coupon or
pay-in-kind bonds, rather than income-bearing high yield securities, may be more
speculative and may be subject to greater fluctuations in value due to changes
in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in a Fund's portfolio and to
dispose of those securities. Adverse
5
<PAGE>
publicity and investor perceptions may decrease the values and liquidity of high
yield securities. These securities may also involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently- issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interests of a Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"Taxes."
Municipal Securities. Municipal Securities are debt securities issued by or on
behalf of states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain funds for
various public purposes. The interest on these obligations is generally exempt
from federal income tax in the hands of most investors, except for the possible
applicability of the AMT. The two principal classifications of municipal
securities are "Notes" and "Bonds."
1. Municipal Notes. Municipal Notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
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
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reserve fund whose monies may also be used to make principal and interest
payments on the issuer's obligations. Housing finance authorities have a wide
range of security including partially or fully insured, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. In addition to a debt service reserve fund, some authorities provide
further security in the form of a state's ability (without obligation) to make
up deficiencies in the debt service reserve fund. Lease rental revenue bonds
issued by a state or local authority for capital projects are secured by annual
lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected. Each Fund may invest more than 25% of its total assets in
industrial development or other private activity bonds, subject to each Fund's
fundamental investment policies, and also subject to each Fund's current
intention not to invest in municipal securities whose investment income is
taxable or AMT bonds, or in the case of SMMB and SHYTFF, subject to the Fund's
20% limitation on investing in AMT bonds. For the purposes of each Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
3. Municipal Lease Obligations and Participation Interests. A municipal
lease obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover a Fund's original investment.
Participation interests represent undivided interests in municipal leases,
installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts. They may be variable or fixed rate.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace in which the
security trades. In addition, the Adviser will consider factors unique to
particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund.
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Each Fund may purchase participation interests in municipal lease
obligations held by banks or other financial institution in all or part of
specific holdings of municipal obligations, provided the participation interest
is fully insured. Each participation is backed by an irrevocable letter of
credit or guarantee of the selling bank that the Adviser has determined meets
the prescribed quality standards of each Fund. Therefore, either the credit of
the issuer of the municipal obligation or the selling bank, or both, will meet
the quality standards of the particular Fund. A Fund has the right to sell the
participation back to the bank after seven days' notice for the full principal
amount of a Fund's interest in the municipal obligation plus accrued interest,
but only (i) as required to provide liquidity to the Fund, (ii) to maintain a
high quality investment portfolio or (iii) upon a default under the terms of the
municipal obligation. The selling bank will receive a fee from a Fund in
connection with the arrangement. Such participations provide a Fund with the
right to a pro rata undivided interest in the underlying municipal lease
obligations. In addition, such participations generally provide a Fund with the
right to demand payment, on not more than seven days' notice, of all or any part
of a Fund's participation interest in the underlying municipal lease obligation,
plus accrued interest. A Fund will not purchase participation interests unless
in the opinion of bond counsel, counsel for the issuers of such participations
or counsel selected by the Adviser, the interest from such participations is
exempt from regular federal income tax and state income tax, if applicable, for
a Fund.
4. Other Municipal Securities. There is, in addition, a variety of hybrid
and special types of municipal securities as well as numerous differences in the
security of municipal securities both within and between the two principal
classifications above.
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit a Fund to demand payment of the unpaid principal balance
plus accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument. The Fund intends to exercise
the demand only (1) upon a default under the terms of the municipal obligation,
(2) as needed to provide liquidity to the Fund, or (3) to maintain a high
quality investment portfolio or (4) to maximize the Fund's yields. A bank that
issues a repurchase commitment may receive a fee from a Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that a Fund may purchase are payable
on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Fund will
determine the variable rate demand instruments that they will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The 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 a Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of a Fund. The Adviser will
reevaluate each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet a Fund's quality
criteria.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. The Fund may purchase variable rate demand instruments on
which stated minimum or maximum rates, or maximum rates set by state law, limit
the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent it does, increases or decreases in value of such
variable rate demand notes may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the variable
rate demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
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The maturity of the variable rate demand instruments held by the Fund will
ordinarily be deemed to be the longer of (1) the notice period required before a
Fund is entitled to receive payment of the principal amount of the instrument or
(2) the period remaining until the instrument's next interest rate adjustment.
5. General Considerations. An entire issue of Municipal Securities may be
purchased by one or a small number of institutional investors such as one of the
Fund. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933, as amended (the "1933
Act") prior to offer and sale unless an exemption from such registration is
available, municipal securities 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 Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the identification
of the "issuer" of municipal securities which are not General Obligation Bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal securities whose issuers are located in the same state or
more than 25% of its total assets in municipal securities the security of which
is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; or colleges and
universities. Each Fund may invest more than 25% of its total assets in
municipal securities of one or more of the following types: public housing
authorities; general obligations of states and localities; lease rental
obligations of states and local authorities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. There could be economic, business or
political developments, which might affect all municipal securities of a similar
type. However, the Adviser believes that the most important consideration
affecting risk is the quality of particular issues of municipal securities
rather than factors affecting all, or broad classes of, municipal securities.
When-Issued or Forward Delivery Securities. The Fund may purchase securities
offered on a "when-issued" or "forward delivery" basis. When so offered, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by the purchaser to the
issuer and no interest on the when-issued or forward delivery security accrues
to the purchaser. To the extent that assets of a Fund are not invested prior to
the settlement of a purchase of securities, that Fund will earn no income;
however, it is intended that each Fund will be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, it is
intended that each Fund will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
Adviser does not believe that the net asset value or income of the portfolios
will be adversely affected by the purchase of securities on a when-issued or
forward delivery basis. The Fund will establish with its custodian a segregated
account in which it will maintain cash or liquid assets, equal in value to
commitments for when-issued or forward delivery securities. Such segregated
securities may mature or be sold, if necessary, on or before the settlement
date. The Fund will not enter into such transactions for leverage purposes.
Stand-by Commitments. The Fund may engage in Stand-by Commitments 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
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specified price. Stand-by Commitments are also known as "puts." The Fund's
investment policies permit the acquisition of Stand-by Commitments solely to
facilitate portfolio liquidity. The exercise 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 Fund 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. The Fund expects to refrain from
exercising a Stand-by Commitment in the event that the amount receivable upon
exercise of the Stand-by Commitment is significantly greater than the then
current market value of the underlying municipal securities in order to avoid
imposing a loss on a seller and thus jeopardizing that Fund's business
relationship with that seller.
The Fund expects that Stand-by Commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by 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 Fund's Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, in
the case of the Fund, 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 Fund 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. The Fund intends to take the position that it owns any municipal
obligations acquired subject to a Stand-by Commitment and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
its hands. There is no assurance that the IRS will agree with such position in
any particular case. There is no assurance that Stand-by Commitments will be
available to the Fund nor has any Fund assumed that such commitments would
continue to be available under all market conditions.
Third Party Puts. The Fund may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or trust certificates and may be combined with other features
such as interest rate swaps. The Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
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The financial institution granting the option does not provide credit
enhancement, and in the event that there is a default in the payment of
principal or interest, or downgrading of a bond to below investment grade, or a
loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-by Commitments discussed above. As with any Stand-by
Commitments acquired by a Fund, the Fund intends to take the position that it is
the owner of any municipal obligation acquired subject to a third-party put, and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the IRS will agree with
such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of tender fees and swap payments, in relation to various regulated investment
company tax provisions is unclear. However, the Adviser intends to manage the
Fund's portfolios in a manner designed to minimize any adverse impact from these
investments.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other issuers of obligations the Fund may purchase or to be
at least equal to that of issuers of commercial paper rated within the two
highest grades assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable income
on funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a Fund) acquires a security ("obligation") and the seller
agrees, at the time of sale, to repurchase the obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities is kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to a Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to a Fund
together with the repurchase price upon repurchase. In either case, the income
to a Fund (which is taxable) is unrelated to the interest rate on the obligation
itself. Obligations will be physically held by the custodian or in the Federal
Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by that Fund to the seller. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the obligation before repurchase of the obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the obligation. If the court characterized the transaction as a loan
and a Fund has not perfected a security interest in the obligation, that Fund
may be required to return the obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, a Fund would
be at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the obligation, in which
case a Fund may incur a loss if the proceeds to that Fund from the sale to a
third party are less than the repurchase price. However, if the market value of
the obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund involved will direct the seller
of the obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed upon time and price. The
Fund 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 the Fund's investment
restrictions applicable to that activity. The Fund will enter into reverse
repurchase agreements only when the Adviser believes that the interest
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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 a Fund's volatility
and the risk of loss in a declining market. Borrowing by a Fund will involve
special risk considerations. Although the principal of a Fund's borrowings will
be fixed, a Fund's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the fixed-income securities in Fund's portfolio or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, a Fund may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limits imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a substitute for purchasing
or selling particular securities. Some Strategic Transactions may also be used
to enhance potential gain although no more than 5% of a Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
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ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
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. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within
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seven days. The Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with 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. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to each Fund's limitation on investing no
more than 15% of its net assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered" (i.e., a Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though a Fund will receive the option
premium to help protect it against loss, a call sold by a Fund exposes that Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require that Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
a Fund's total assets would be required to be segregated to cover 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. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by 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.
The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires
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a Fund to deposit with a financial intermediary as security for its obligations
an amount of cash or other specified assets (initial margin) which initially is
typically 1% to 10% of the face amount of the contract (but may be higher in
some circumstances). Additional cash or assets (variation margin) may be
required to be deposited thereafter on a daily basis as the mark to market value
of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of a Fund. If a Fund exercises an option on a futures contract it will
be obligated to post initial margin (and potential subsequent variation margin)
for the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of that Fund's total assets (taken at current value); however,
in the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. Each Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
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Each Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, each Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
each Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. Each Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the
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extent that a specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and the Fund believes such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. Each Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent that obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a Fund to pay
or deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require that Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate cash or liquid assets
equal to the exercise price.
Except when a Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to that Fund's obligations or to
segregate liquid assets equal to the amount of that Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net
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obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by a Fund, or the in-the-money amount plus any sell-back formula amount in
the case of a cash-settled put or call. In addition, when a Fund sells a call
option on an index at a time when the in-the-money amount exceeds the exercise
price, that Fund will segregate, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by a Fund other than those above generally settle with
physical delivery, or with an election of either physical delivery or cash
settlement and that Fund will segregate an amount of cash or liquid assets equal
to the full value of the option. OTC options settling with physical delivery or
with an election of either physical delivery or cash settlement will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash or
liquid assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Illiquid Securities. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted or illiquid securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale. It is each Fund's
policy that illiquid securities (including repurchase agreements of more than
seven days duration, certain restricted securities, and other securities which
are not readily marketable) may not constitute, at the time of purchase, more
than 15% of the value of the Fund's net assets. The Fund's Board of Trustees has
approved guidelines for use by the Adviser in determining whether a security is
illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; or (iii) in limited quantities after they have
been held for a specified period of time and other conditions are met pursuant
to an exemption from registration. Issuers of restricted securities may not be
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Fund's Board of Trustees. In reaching
liquidity decisions, the Adviser will consider the following factors: (1) the
frequency of trades and quotes for the security, (2) the number of dealers
wishing to purchase or sell the security and the
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number of their potential purchasers, (3) dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (i.e. the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends
The Fund will follow the practice of distributing substantially all of
their net investment income and any excess of net realized short-term capital
gains over net realized long-term capital losses. In the past, the Fund has
followed the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However, if
it appears to be in the best interest of such Fund and the relevant
shareholders, such Fund may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly on the fourth Boston business day of each month for
the preceding month's net income. Distributions of realized capital gains, if
any, are paid in November or December, although an additional distribution may
be made, if necessary, and the Fund expects to continue to distribute net
capital gains at least annually. Both types of distributions will be made in
shares of that Fund and confirmations will be mailed to each shareholder unless
a shareholder has elected to receive cash, in which case a check will be sent.
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.
The 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. The Fund intends to continue to so qualify, in each
taxable year as required under the Code in order to avoid payment of federal
income tax at the Fund level.
In order to qualify as a regulated investment company, the 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, the 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. The Fund 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).
The Fund 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 Fund's
distribution policies should enable them to avoid excise tax liability, each
Fund may retain (and be subject to income
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or excise tax on) a portion of its capital gain or other income if it appears to
be in the best interest of such Fund and its shareholders.
Net investment income is made up of dividends and interest, less expenses.
Net realized capital gains for a fiscal year are computed by taking into account
any capital loss carryforward or post-October loss of a Fund from the prior
fiscal year. As of May 31, 2000, the Fund had a net tax basis capital loss
carryforward of approximately $3,200,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until May 31, 2008, the expiration date, whichever occurs first.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon, the Fund involved will elect to treat
such capital gains as having been distributed to its shareholders. As a result,
shareholders will report such capital gains as long-term capital gains will be
able to claim a proportionate share of federal income taxes paid by that Fund on
such gains as a credit against the shareholder's federal income tax liability,
and will be entitled to increase the adjusted tax basis of the shareholder's
Fund shares by the difference between such reported gains and the shareholder's
tax credit. However, retention of such gains by a Fund may cause the Fund to be
liable for an excise tax on all or a portion of those gains.
Properly designated distributions of taxable net investment income and the
excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow-through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of the taxable year is invested in state,
municipal and other obligations the interest on which is exempt under Section
103(a) of the Code. The Fund 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 Fund for the taxable year are
therefore not subject to regular federal income tax, although they may be
subject to the individual and corporate alternative minimum taxes described
below. Discount from certain stripped tax-exempt obligations or their coupons,
however, may be taxable.
If a Fund invests in certain high yield original issue discount
obligations issued by corporations (including tax-exempt obligations), a portion
of the original issue discount accruing on the obligation may be treated as
taxable dividend income. In such event, dividends of investment company taxable
income received from the Fund by its shareholders, to the extent attributable to
such portion of accrued original issue discount, would be taxable. Any such
dividends received by the Fund's corporate shareholders may be eligible for the
deduction for dividends received by corporations.
Any market discount recognized on a tax-exempt bond is taxable as ordinary
income. A market discount bond is a bond acquired in the secondary market at a
price below its redemption value (or its adjusted issue price if issued with
original issue discount). Under prior law, the treatment of market discount as
ordinary income did not apply to tax-exempt obligations. Gain on the disposition
of a tax-exempt obligation will be treated as ordinary income (instead of
capital gain) to the extent of accrued market discount.
Since no portion of the income of the Fund will be comprised of dividends
from domestic corporations, none of the income distributions of the Fund will be
eligible for the 70% deduction for dividends received from the 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 as long-term capital gains,
regardless of the length of time the shares of the Fund involved have been held
by such shareholders. Such distributions are not eligible for the
dividends-received deduction to corporate shareholders of the Fund. 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 Fund
20
<PAGE>
may be disallowed if shares of the same Fund are purchased (including shares
purchased under the dividend investment plan or the automatic reinvestment plan)
within 30 days before or after such redemption.
Distributions derived from interest which is exempt from regular federal
income tax may subject corporate shareholders to or increase their liability
under the 20% AMT. A portion of such distributions may constitute a tax
preference item for individual shareholders and may subject them to or increase
their liability under the 26% and 28% AMT.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, the Fund issues to its
shareholders a statement of the federal income tax status of all distributions,
including a statement of the percentage of the prior calendar year's
distributions which were designated as tax-exempt, the percentage of such
tax-exempt distributions treated as a tax-preference item for purposes of the
AMT, and the source of such distributions on a state-by-state basis. All
distributions of taxable or tax-exempt net investment income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and distributions
declared in October, November or December to shareholders as of a record date in
such a month will be deemed to have been received by shareholders in December if
paid during January of the following year. Redemptions of shares including
exchanges for shares of another Scudder Fund may result in tax consequences
(gain or loss) to the shareholder and are also subject to these reporting
requirements.
Investors should consider the tax implications of buying shares just prior
to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them (to the extent that
such distribution is from taxable income or gain).
All futures contracts and all options on futures contracts written or
purchased will be governed by Section 1256 of the Code. Absent a tax election to
the contrary, gain or loss attributable to the lapse, exercise or closing out of
any such position generally will be treated as 60% long-term and 40% short-term
capital gain or loss, and on the last trading day of the fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e. treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss.
Positions of the 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. The Fund will
monitor their transactions in options and futures and may make certain tax
elections in order to mitigate the operation of these rules and prevent their
disqualification as regulated investment companies for federal income tax
purposes.
Under the federal income tax law, the Fund will be required to report to
the IRS all distributions of taxable income, capital gains and gross proceeds
from the redemption or exchange of shares, except in the case of certain exempt
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 the 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 the Fund may be
subject to backup withholding. If the withholding provisions are applicable,
21
<PAGE>
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 the Fund will not be deductible for federal income tax purposes. Under
rules used by the IRS to determine when borrowed funds are used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of interest
on certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed by such obligations. The Fund
has not undertaken any investigation as to the users of the facilities financed
by bonds in its portfolio.
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. The 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
the Fund and redemptions of the shares of the 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.
The 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 Fund.
PERFORMANCE
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information. Returns for Class A, B and C shares are derived from
the historical performance of Class S Shares, adjusted to reflect the estimated
operating expenses applicable to Class A, B and C shares, which may be higher or
lower than those of Class S shares.
Performance figures prior to December 29, 2000 (commencement of operations) for
Class A, B and C shares are derived from the historical performance of Class S
shares, adjusted to reflect the operating expenses applicable to Class A, B and
C shares, which may be higher or lower than those of Class S shares. The
performance figures are also adjusted to reflect the maximum sales charge of
[XX%] for Class A shares and the maximum current contingent deferred sales
charge of [XX%] for Class B shares and [XX%] for Class C shares.
22
<PAGE>
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of the Fund as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Return
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. 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
computing 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:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Returns for the Period Ended May 31, 2000 (1)(2)
1 Year 5 Years 10 Years Life of Fund
Scudder Medium Term Tax ____% ____% ____% ____%
Free Fund -- Class A
Scudder Medium Term Tax ____% ____% ____% ____%
Free Fund -- Class B
Scudder Medium Term Tax ____% ____% ____% ____%
Free Fund -- Class C
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction is based upon the performance of Class S shares.
(2) As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average
annual total return for the Fund or class will vary based on changes in
market conditions and the level of the Fund's and class' expenses.
In connection with communicating its average annual total return to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
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 the 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 computing 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:
23
<PAGE>
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Returns for the Period Ended May 31, 2000 (1)
1 Year 5 Years 10 Years Life of Fund
Scudder Medium Term Tax ____% ____% ____% ____%
Free Fund -- Class A
Scudder Medium Term Tax ____% ____% ____% ____%
Free Fund -- Class B
Scudder Medium Term Tax ____% ____% ____% ____%
Free Fund -- Class C
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class B and C shares for the period prior to their
introduction is based upon the performance of Class S shares.
Total Return
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.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of the Fund apart from capital appreciation will be cited, as
an update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Fund's and classes' performance data.
Quotations of a Fund's performance are based on historical earnings, show the
performance of a hypothetical investment, and are not intended to indicate
future performance of that Fund. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of a Fund will vary based on
changes in market conditions and the level of that Fund's expenses.
SEC Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Included in net
investment income is the amortization of market premium or accretion of market
and original issue discount. Yield, sometimes referred to as a Fund's "SEC
yield," is calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6 - 1]
Where:
a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of expense
maintenance).
c = The average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = The maximum offering price per share on the last day
of the period.
Yields for the 30-day period ended May 31, 2000
--------------------------------------------------------------
Scudder Medium Term Tax Free Fund -- Class S (1) 4.79%
--------------------------------------------------------------
(1) Because Class A, B and C shares were not introduced until December 29,
2000, only the returns for Class S shares are presented.
24
<PAGE>
Tax-Equivalent Yield is the net annualized taxable yield needed to produce
a specified tax-exempt yield at a given tax rate based on a specified 30-day (or
one month) period assuming a reinvestment of all dividends paid during such
period (a method known as "semiannual compounding"). Tax-equivalent yield is
calculated by dividing that portion of the Fund's yield (as computed in the
yield description in D., above) which is tax-exempt by one minus a stated
Federal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
Tax-Equivalent Yields as of May 31, 2000
TAXABLE EQUIVALENT*
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
28% 31% 36% 39.6%
FUND Tax Bracket Tax Bracket Tax Bracket Tax Bracket
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scudder Medium Term Tax Free Fund -- Class S (1) 6.65% 6.94% 7.48% 7.93%
-----------------------------------------------------------------------------------------------------------
</TABLE>
* Based on federal income tax rates in effect for the 1999 taxable year.
(1) Because Class A, B and C shares were not introduced until December 29,
2000, only the returns for Class S shares are presented.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1999
calendar year.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
1999 Taxable Federal To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a
Income Brackets Tax Rates Taxable Investment Would Have To Earn*
-------------------------------------------------------------------------------------------------------------------------
Individual 5% 7% 9%
Return
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0 - $25,750 15.0% 5.88% 8.24% 10.59%
-------------------------------------------------------------------------------------------------------------------------
$25,751- $62,450 28.0% 6.94% 9.72% 12.50%
-------------------------------------------------------------------------------------------------------------------------
$62,451 - $130,250 31.0% 7.25% 10.14% 13.04%
-------------------------------------------------------------------------------------------------------------------------
$130,251 - $283,150 36.0% 7.81% 10.94% 14.06%
-------------------------------------------------------------------------------------------------------------------------
Over $283,150 39.6% 8.28% 11.59% 14.90%
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Joint 5% 7% 9%
Return
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0 - $43,050 15.0% 5.88% 8.24% 10.59%
-------------------------------------------------------------------------------------------------------------------------
$43,051 - $104,050 28.0% 6.94% 9.72% 12.50%
-------------------------------------------------------------------------------------------------------------------------
$104,051 - $158,550 31.0% 7.25% 10.14% 13.04%
-------------------------------------------------------------------------------------------------------------------------
$158,551 - $283,150 36.0% 7.81% 10.94% 14.06%
-------------------------------------------------------------------------------------------------------------------------
Over $283,150 39.6% 8.28% 11.59% 14.90%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
* These illustrations assume the Federal AMT is not applicable, that an
individual is not a "head of household" and claims one exemption and that
taxpayers filing a joint return claim two exemptions. Note also that these
federal income tax brackets and rates do not take into account the effects
of (i) a reduction in the deductibility of itemized deductions for
taxpayers whose federal adjusted gross income exceeds $124,500 ($62,250 in
the case of a married individual filing a separate return), or of (ii) the
gradual phaseout of the personal exemption amount for taxpayers whose
federal adjusted gross income exceeds $124,500 (for single individuals) or
$186,800 (for married individuals filing jointly). The effective federal
tax rates and equivalent yields for such taxpayers would be higher than
those shown above.
25
<PAGE>
Example:
Based on 1999 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $50,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that a fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
As described above, average annual total return, cumulative total return,
total return, yield, and tax-equivalent yield are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Average annual total return, cumulative total return, total return,
yield, and tax-equivalent yield for a Fund will vary based on changes in market
conditions and the level of a Fund's expenses.
Investors should be aware that the principal of each Fund is not insured.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests.
From time to time, in advertising and marketing literature, the 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, members of the Board
and officers of the Fund, the 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 Fund. 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 Fund may be advertised as an investment choice in Scudder's college planning
program.
Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund 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 Fund
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
26
<PAGE>
issuers of the securities. The risks/returns associated with an investment in
international bond or equity funds also will depend upon currency exchange rate
fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information made by
independent sources may also be used in advertisements concerning the Fund,
including reprints of, or selections from, editorials or articles about the
Fund.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc. (the "Advisor"), Two
International Place, Boston, Massachusetts, an investment counsel firm, acts as
investment advisor to the Fund. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc., ("Scudder") is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Advisor introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder entered
into an agreement with Zurich Insurance Company ("Zurich") pursuant to which
Scudder and Zurich agreed to form an alliance. On December 31, 1997, Zurich
acquired a majority interest in Scudder, and Zurich Kemper Investments, Inc., a
Zurich subsidiary, became part of Scudder. Scudder's name has been changed to
Scudder Kemper Investments, Inc. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in Scudder Kemper) and the financial services
businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders. The
Advisor manages the Fund's daily investment and business affairs subject to the
policies established by the Trust's Board of Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
Pursuant to an investment management agreement with the Fund, the Advisor
acts as the Fund's investment adviser, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Advisor receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
27
<PAGE>
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Advisor. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
A new investment management agreement (the "Agreement") for the Fund was
last approved by the Board on July 10, 2000 and became effective on July 31,
2000. The Agreement was subsequently amended and restated by the Trustees on
October 10, 2000. The Agreement continues in effect until September 30, 2001.
The Agreement will continue from year to year thereafter only if its continuance
is approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement or interested persons of the Adviser or the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and either by a vote of the Trustees or of a majority of the outstanding voting
securities of the Fund. The Agreement may be terminated at any time without
payment of penalty by either party on sixty days' notice and automatically
terminates in the event of its assignment.
Under the Agreement, the Advisor regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of the Fund's
assets shall be held uninvested, subject to the Trust's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to the Fund's investment objective, policies
and restrictions, and subject, further, to such policies and instructions as the
Board of Trustees of the Trust may from time to time establish. The Advisor also
advises and assists the officers of the Trust in taking such steps as are
necessary or appropriate to carry out the decisions of its Trustees and the
appropriate committees of the Trustees regarding the conduct of the business of
the Fund.
Under the Agreement, the Advisor renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, Custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Fund's federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers
and executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
For the above services the Fund pays an annual rate of 0.60 of 1% of the
first $500 million of average daily net assets, 0.50 of 1% of such assets in
excess of $500 million, and 0.475 of 1% of such assets over $1 billion, payable
monthly, provided the Fund will make such interim payments as may be requested
by the Adviser not to exceed 75% of the amount of the fee then accrued on the
books of the Fund and unpaid.
28
<PAGE>
For the years ended December 31, 1997 and 1998, the Fund's fees pursuant
to such Agreement amounted to $3,710,976 and $3,867,414, respectively. For the
five-month period ended May 31, 1999, and the fiscal year ended May 31, 2000,
the fees imposed amounted to $1,588,972 and $3,392,370, respectively.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; any other expenses of issue, sale, underwriting,
distribution, redemption or repurchase of shares; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Fund who are not affiliated with the
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Advisor concerning such Agreement, the Trustees of the Trust who are not
"interested persons" of the Advisor are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Advisor shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Advisor's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives
and policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
AMA INVESTMENTLINK(SM) PROGRAM
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the The Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be
29
<PAGE>
purchased or held by the Fund, subject to requirements and restrictions set
forth in the applicable Code of Ethics. The The Advisor's Code of Ethics
contains provisions and requirements designed to identify and address certain
conflicts of interest between personal investment activities and the interests
of the Fund. Among other things, the The Advisor's Code of Ethics prohibits
certain types of transactions absent prior approval, imposes time periods during
which personal transactions may not be made in certain securities, and requires
the submission of duplicate broker confirmations and quarterly reporting of
securities transactions. Additional restrictions apply to portfolio managers,
traders, research analysts and others involved in the investment advisory
process. Exceptions to these and other provisions of the The Advisor's Code of
Ethics may be granted in particular circumstances after review by appropriate
personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long
as such continuance is approved for each class at least annually by a vote of
the Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule
12b-1 (the "Rule 12b-1 Plan") that provides for fees payable as an expense of
the Class B shares and Class C shares that are used by KDI to pay for
distribution and services for those classes. Because 12b-1 fees are paid out of
fund assets on an ongoing basis they will, over time, increase the cost of an
investment and cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees
payable as an expense of the Class B shares and the Class C shares that are used
by KDI to pay for distribution services for those classes, that agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in
which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its
terms, the obligation of a Fund to make payments to KDI pursuant to the Plan
will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from
the Fund, payable monthly, at the annual rate of [XX%] of average daily net
assets of the Fund attributable to Class B shares. This fee is accrued daily as
an expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from
the Fund, payable monthly, at the annual rate of [XX%] of average daily net
assets of the Fund attributable to Class C shares. This fee is accrued daily as
an expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of [XX%] of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of [XX%] of net
assets attributable to Class C shares
30
<PAGE>
maintained and serviced by the firm and the fee continues until terminated by
KDI or a Fund. KDI also receives any contingent deferred sales charges.
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to [XX%] of average daily
net assets of Class A, B and C shares of the Fund.
KDI enters into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms") that provide services and
facilities for their customers or clients who are investors in the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A Shares, KDI pays each firm a service fee,
payable quarterly, at an annual rate of up to [XX%] of the net assets in Fund
accounts that it maintains and services attributable to Class A Shares,
commencing with the month after investment. With respect to Class B and Class C
Shares, KDI currently advances to firms the first-year service fee at a rate of
up to [XX%] of the purchase price of such Shares. For periods after the first
year, KDI currently intends to pay firms a service fee at a rate of up to [XX%]
(calculated monthly and paid quarterly) of the net assets attributable to Class
B and Class C Shares maintained and serviced by the firm. After the first year,
a firm becomes eligible for the quarterly service fee and the fee continues
until terminated by KDI or the Fund. Firms to which service fees may be paid
include affiliates of KDI. In addition KDI may, from time to time, from its own
resources pay certain firms additional amounts for ongoing administrative
services and assistance provided to their customers and clients who are
shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion
of the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of [XX%]
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of [XX%] based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of [XX%] on all Fund assets
in the future
Certain trustees or officers of the Fund are also directors or officers of
the Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund. Prior to the implementation of the
Administration Agreement, the Fund paid SFAC an annual fee equal to 0.024% of
the first $150 million of average daily net assets, 0.0070% of such assets in
excess of $150 million, 0.0040% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. For the year ended December
31, 1996, the amounts charged to the Fund by SFAC aggregated $91,551. For the
year ended December 31, 1997, the amounts unpaid by the Fund $7,665. For the
year ended December 31, 1998, the amounts charged to the Fund by SFAC aggregated
$93,421. For the five-month period ended May 31, 1999, the amount charged by
SFAC to the Fund aggregated $38,815, of which $7,681 was unpaid at May 31, 1999.
For the fiscal year ended May 31, 2000, the amount charged by SFAC to the Fund
aggregated $84,065, of which $6,243 was unpaid at May 31, 2000.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. KSVC receives as transfer agent, annual account fees of $5 per
account, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement.
31
<PAGE>
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
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
Fund. 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 Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through
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<PAGE>
whom other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to the Fund.
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
The portfolio turnover rate of the Fund (defined by the SEC as the ratio
of the lesser of sales or purchases to the monthly average value of such
securities owned during the year, excluding all securities whose remaining
maturates at the time of acquisition were one year or less) for the years ended
December 31, 1997 and 1998 were 13% and 11%, respectively. For the five months
ended May 31, 1999, and the fiscal year ended May 31, 2000, the portfolio
turnover rates were 13% (annualized) and 21%, respectively.
NET ASSET VALUE
The net asset value of shares of each class of the Fund is computed as of
the close of regular trading on the Exchange on each day the Exchange is open
for trading (the "Value Time"). The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Net asset value per share
is determined separately for each class of shares by dividing the value of the
total assets of a Fund, less all liabilities attributable to that class, by the
total number of shares of that class outstanding. The per share net asset value
of the Class B and Class C Shares of the Fund will generally be lower than that
of the Class A Shares of the Fund because of the higher expenses borne by the
Class B and Class C Shares.
An exchange-traded equity security is valued at its most recent sale price
on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation on such exchange as of the Value Time. An equity security
which is traded on the Nasdaq Stock Market Inc. ("Nasdaq") system will be valued
at its most recent sale price on such system as of the Value Time. Lacking any
sales, the security is valued at the most recent bid quotation as of the Value
Time. The value of an equity security not quoted on the Nasdaq System, but
traded in another over-the-counter market, is its most recent sale price if
there are any sales of such security on such market as of the Value Time.
Lacking any sales, the security is valued at the Calculated Mean quotation for
such security as of the Value Time. Lacking a Calculated Mean quotation, the
security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s), which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
by the amortized cost, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
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<PAGE>
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner that, in the discretion of the Valuation Committee most fairly
reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net
asset value per such shares next determined after an order is received in proper
form plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is [$XX] and the minimum subsequent
investment is [$XX] but such minimum amounts may be changed at any time. The
Fund may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in
their initial and contingent deferred sales charge structures and in their
ongoing expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of [None(1)] Initial sales charge
[XX%] of the public offering price waived or reduced for
certain purchases
Class B Maximum contingent deferred sales [XX%] Shares convert to Class A
charge of [XX%] of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of [XX%] No conversion feature
[XX%] of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
34
<PAGE>
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales
charge if redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
[$XX] and the minimum subsequent investment is [$XX]. The minimum initial
investment for an Individual Retirement Account is [$XX] and the minimum
subsequent investment is [$XX]. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is [$XX]. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may
not be available for certain types of account registrations. It is recommended
that investors not request share certificates unless needed for a specific
purpose. You cannot redeem shares by telephone or wire transfer or use the
telephone exchange privilege if share certificates have been issued. A lost or
destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $100,000 [XX%] [XX%] [XX%]
$100,000 but less than $250,000 [XX] [XX] [XX]
$250,000 but less than $500,000 [XX] [XX] [XX]
$500,000 but less than $1 million [XX] [XX] [XX]
$1 million and over [XX**] [XX**] [***]
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI,
the Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Scudder
Kemper Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" totals at least $1,000,000 including purchases of Class A shares
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
35
<PAGE>
cumulative amount invested by the purchaser in the Fund and other Scudder Kemper
Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features referred to above. The privilege of
purchasing Class A shares of the Fund at net asset value under the Large Order
NAV Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of the Fund or of any other Scudder Kemper Mutual Funds
listed under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any
amount by certain professionals who assist in the promotion of Kemper Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a)
officers, trustees, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c) any trust,
pension, profit-sharing or other benefit plan for only such persons; (d) persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisers registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
36
<PAGE>
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to [XX%] of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of
the Fund six years after issuance on the basis of the relative net asset value
per share of the Class B shares. The purpose of the conversion feature is to
relieve holders of Class B shares from the distribution services fee when they
have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund account will be
converted to Class A shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of [XX%] of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of [XX%] of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Scudder Kemper Mutual Funds listed under
"Special Features - Class A Shares - Combined
37
<PAGE>
Purchases" is in excess of $1 million for Class B shares or $5 million for Class
C shares including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described under "Special Features."
KemFlex Plans that on May 1, 2000 have in excess of $1 million invested in Class
B shares of Kemper Mutual Funds, or have in excess of $850,000 invested in Class
B shares of Kemper Mutual Funds and are able to qualify for the purchase of
Class A shares at net asset value (e.g., pursuant to a Letter of Intent), will
have future investments made in Class A shares and will have the option to
covert their holdings in Class B shares to Class A shares free of any contingent
deferred sales charge on May 1, 2002. For more information about the three sales
arrangements, consult your financial representative or the Shareholder Service
Agent. Financial services firms may receive different compensation depending
upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the
amount of shares of the Fund sold under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will,
from time to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price
based on the net asset value of the Fund next determined after receipt in good
order by KDI of the order accompanied by payment. However, orders received by
dealers or other financial services firms prior to the determination of net
asset value (see "Net Asset Value") and received in good order by KDI prior to
the close of its business day will be confirmed at a price based on the net
asset value effective on that day ("trade date"). The Fund reserves the right to
determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank. Therefore, if an order
is accompanied by a check drawn on a foreign bank, funds must normally be
collected before shares will be purchased. See "Purchase and Redemption of
Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
38
<PAGE>
The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders for any reason. Also, from
time to time, the Fund may temporarily suspend the offering of any class of its
shares to new investors. During the period of such suspension, persons who are
already shareholders of such class of such Fund normally are permitted to
continue to purchase additional shares of such class and to have dividends
reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811
Main Street, Kansas City, Missouri 64105-2005 or to the firm from which they
received this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 219153, Kansas City, Missouri 64141-9153. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net
asset value per share of that class of the Fund next determined following
receipt by the Shareholder Service Agent of a properly executed request with any
required documents as described above. Payment for shares redeemed will be made
in cash as promptly as practicable but in no event later than seven days after
receipt of a properly executed request accompanied by any outstanding share
certificates in proper form for transfer. When the Fund is asked to redeem
shares for which it may not have yet received good payment (i.e., purchases by
check, EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of
redemption proceeds until it has determined that collected funds have been
received for the purchase of such shares, which will be up to 10 days from
receipt by the Fund of the purchase amount. The redemption within two years of
Class A shares purchased at net asset value under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares"), the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption of Class C shares within the first year following purchase may be
subject to a contingent deferred sales charge (see "Contingent Deferred Sales
Charge -- Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may
assess a quarterly fee of $9 on any account with a balance below [$XX] for the
quarter. The fee will not apply to accounts enrolled in an automatic investment
program, Individual Retirement Accounts or employer-sponsored employee benefit
plans using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited
wire transfer redemptions and EXPRESS-Transfer transactions (see "Special
Features") and exchange transactions for individual and institutional accounts
and pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the
39
<PAGE>
account application. The Fund or its agents may be liable for any losses,
expenses or costs arising out of fraudulent or unauthorized telephone requests
pursuant to these privileges unless the Fund or its agents reasonably believe,
based upon reasonable verification procedures, that the telephonic instructions
are genuine. The shareholder will bear the risk of loss, including loss
resulting from fraudulent or unauthorized transactions, so long as reasonable
verification procedures are followed. Verification procedures include recording
instructions, requiring certain identifying information before acting upon
instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
40
<PAGE>
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal
41
<PAGE>
based on the shareholder's life expectancy including, but not limited to,
substantially equal periodic payments described in Internal Revenue Code Section
72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to satisfy required
minimum distributions after age 70 1/2 from an IRA account (with the maximum
amount subject to this waiver being based only upon the shareholder's Kemper IRA
accounts), (f) for any participant-directed redemption of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent (g) redemption of
shares by an employer sponsored employee benefit plan that offers funds in
addition to Kemper Funds and whose dealer of record has waived the advance of
the first year administrative service and distribution fees applicable to such
shares and agrees to receive such fees quarterly, and (g) redemption of shares
purchased through a dealer-sponsored asset allocation program maintained on an
omnibus record-keeping system provided the dealer of record had waived the
advance of the first year administrative services and distribution fees
applicable to such shares and has agreed to receive such fees quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
The rate of the contingent deferred sales charge is determined by the
length of the period of ownership. Investments are tracked on a monthly basis.
The period of ownership for this purpose begins the first day of the month in
which the order for the investment is received. For example, an investment made
in March 1998 will be eligible for the second year's charge if redeemed on or
after March 1, 1999. In the event no specific order is requested when redeeming
shares subject to a contingent deferred sales charge, the redemption will be
made first from shares representing reinvested dividends and then from the
earliest purchase of shares. KDI receives any contingent deferred sales charge
directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Scudder Kemper Mutual Funds listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Scudder Kemper Mutual Funds. A
shareholder of the Fund or other Kemper Funds who redeems Class A shares
purchased under the Large Order NAV Purchase Privilege (see "Purchase of Shares
-- Initial Sales Charge Alternative -- Class A Shares") or Class B shares or
Class C shares and incurs a contingent deferred sales charge may reinvest up to
the full amount redeemed at net asset value at the time of the reinvestment, in
the same class of shares as the case may be, of the Fund or of other Kemper
Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge schedule. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Scudder Kemper Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Scudder Kemper Mutual Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
42
<PAGE>
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Kemper Fund), Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper New
Europe Fund, Inc., Kemper Asian Growth Fund, Kemper Aggressive Growth Fund,
Kemper Global/International Series, Inc., Kemper Equity Trust and Kemper
Securities Trust, Scudder 21st Century Fund, The Japan Fund, Inc., Scudder High
Yield Tax Free Fund, Scudder Pathway Series - Balanced Portfolio, Scudder
Pathway Series - Conservative Portfolio, Scudder Pathway Series - Growth
Portfolio, Scudder International Fund, Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, Scudder Health Care Fund, Scudder Technology Fund,
Global Discovery Fund, Value Fund, and Classic Growth Fund ("Scudder Kemper
Mutual Funds"). Except as noted below, there is no combined purchase credit for
direct purchases of shares of Zurich Money Funds, Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investor's
Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"), which are
not considered a "Scudder Kemper Mutual Fund" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds", (b) all classes of shares of any Kemper Fund and (c) the
value of any other plan investments, such as guaranteed investment contracts and
employer stock, maintained on such subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Scudder Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Funds held of record as of the initial purchase date under the
Letter as an "accumulation credit" toward the completion of the Letter, but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Scudder Kemper Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge
43
<PAGE>
is applicable to a purchase. Upon such notification, the investor will receive
the lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Scudder
Kemper Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Scudder Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Scudder Kemper Mutual
Fund or a Money Market Fund under the exchange privilege described above without
paying any contingent deferred sales charge at the time of exchange. If the
Class A shares received on exchange are redeemed thereafter, a contingent
deferred sales charge may be imposed in accordance with the foregoing
requirements provided that the shares redeemed will retain their original cost
and purchase date for purposes of calculating the contingent deferred sales
charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Scudder Kemper Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Scudder Kemper Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). In addition, shares of a Kemper
fund with a value of $1,000,000 or less (except Kemper Cash Reserves Fund)
acquired by exchange from another Kemper fund, or from a money market fund, may
not be exchanged thereafter until they have been owned for 15 days, if, in the
Adviser's judgment, the exchange activity may have an adverse effect on the
fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Kemper fund and therefore may be
subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under "Redemption or Repurchase of
44
<PAGE>
Shares -- General." Any share certificates must be deposited prior to any
exchange of such shares. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
exchange privilege. The exchange privilege is not a right and may be suspended,
terminated or modified at any time. Exchanges may only be made for Funds that
are available for sale in the shareholder's state of residence. Currently,
Tax-Exempt California Money Market Fund is available for sale only in California
and Investors Municipal Cash Fund is available for sale only in certain states.
Except as otherwise permitted by applicable regulations, 60 days' prior written
notice of any termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated ClearingHouse debits against the designated account at a bank
or other financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
A Fund may immediately terminate a shareholder's Plan in the event that any item
is unpaid by the shareholder's financial institution. The Fund may terminate or
modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $100. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain
45
<PAGE>
dividends will be automatically reinvested at net asset value. A sufficient
number of full and fractional shares will be redeemed to make the designated
payment. Depending upon the size of the payments requested and fluctuations in
the net asset value of the shares redeemed, redemptions for the purpose of
making such payments may reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic
withdrawal plan will ordinarily be disadvantageous to the investor because the
investor will be paying a sales charge on the purchase of shares at the same
time that the investor is redeeming shares upon which a sales charge may have
already been paid. Therefore, the Fund will not knowingly permit additional
investments of less than $2,000 if the investor is at the same time making
systematic withdrawals. KDI will waive the contingent deferred sales charge on
redemptions of Class A shares purchased under the Large Order NAV Purchase
Privilege, Class B shares and Class C shares made pursuant to a systematic
withdrawal plan. The right is reserved to amend the systematic withdrawal plan
on 30 days' notice. The plan may be terminated at any time by the investor or
the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the Exchange is closed other than
customary weekend and holiday closings or during any period in which trading on
the Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their ages, their principal
occupations and their affiliations, if any, with the Advisor, and Scudder
Investor Services, Inc., are as follows:
46
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Linda C. Coughlin (48)+* Trustee and President Managing Director of Scudder Kemper Director and Senior
Investments, Inc. Vice President
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board,
Chapel Hill, NC Inc.(not-for-profit business research
organization)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Keith R. Fox (45) Trustee Private Equity Investor, General --
10 East 53rd Street Partner, Exeter Group of Funds
New York, NY 10022
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski Law
Firm (1978-1996)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital, LLC (venture capital firm)
Boston, MA 02108
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Scudder Kemper __
Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
James M. Eysenbach (38)@ Vice President Managing Director of Scudder Kemper __
Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William F. Glavin (41)# Vice President Managing Director of Scudder Kemper Vice President
Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
James E. Masur (40)+ Vice President Senior Vice President of Scudder __
Kemper Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Scudder Kemper Director, Senior Vice
Assistant Secretary Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Howard S. Schneider (43)# Vice President Managing Director of Scudder Kemper __
Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Scudder
Kemper Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ADDITIONAL OFFICERS
-------------------
[TO BE UPDATED]
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its
counsel to be persons who are "interested persons" of the Adviser or
of the Trust, within the meaning of the Investment Company Act of
1940, as amended.
** Unless otherwise stated, all of the 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
++ Address: 345 Park Avenue, New York, New York
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar capacities
with other Scudder Funds.
[TO BE UPDATED: INSERTION OF SHAREHOLDING INFORMATION]
48
<PAGE>
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general
oversight of the Fund's business. A majority of the Board's members are not
affiliated with Scudder Kemper Investments, Inc. These "Independent Trustees"
have primary responsibility for assuring that the Fund is managed in the best
interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees of the Fund
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as lead trustee receives additional
compensation for his or her service. No additional compensation is paid to any
Independent Trustee for travel time to meetings, attendance at directors'
educational seminars or conferences, service on industry or association
committees, participation as speakers at directors' conferences or service on
special trustee task forces or subcommittees. Independent Trustees do not
receive any employee benefits such as pension or retirement benefits or health
insurance. Notwithstanding the schedule of fees, the Independent Trustees have
in the past and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other funds
managed by the Adviser. These funds differ broadly in type and complexity and in
some cases have substantially different Trustee fee schedules. The following
table shows the aggregate compensation received by each Independent Trustee
during 1999 from each Trust and from all of the Scudder funds as a group.
------------------------------------------------------------
SCUDDER TAX ALL SCUDDER
NAME FREE TRUST* FUNDS
------------------------------------------------------------
Henry P. Becton, Jr.** $ $140,000 (30 funds)
------------------------------------------------------------
Dawn-Marie Driscoll** 150,000 (30 funds)
------------------------------------------------------------
Edgar R. Fiedler+ 73,230 (29 funds)
------------------------------------------------------------
Keith R. Fox** 160,325 (23 funds)
------------------------------------------------------------
Joan E. Spero** 175,275 (23 funds)
------------------------------------------------------------
Jean Gleason Stromberg 40,935 (16 funds)
------------------------------------------------------------
Jean C. Tempel** 140,000 (30 funds)
------------------------------------------------------------
* Scudder Tax Free Trust consists of 1 fund: Scudder Medium Term Tax Free
Fund
** [TO BE UPDATED] Newly elected Trustee. On July 13, 2000, shareholders of
the Fund elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly-constituted Board of Trustees.
+ Mr. Fiedler's total compensation includes the $9,900 accrued, but not
received, through the deferred compensation program.
49
<PAGE>
Members of the Board of Trustees who are employees of the Adviser or its
affiliates receive no direct compensation from the Trust, 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 the Fund.
SHAREHOLDER RIGHTS
Scudder Medium Term Tax Free Fund is a series of Scudder Tax Free Trust, a
Massachusetts business trust established under a Declaration of Trust dated
December 28, 1982, as amended. The name and investment objectives of the Fund
were changed effective November 1, 1990. The Fund's authorized capital consists
of an unlimited number of shares of beneficial interest, $.01 par value. The
Fund is further divided into five classes of shares: Class AARP, Class S, Class
A, Class B, and Class C. Only Classes A, B and C are offered in this Statement
of Additional Information.
The Trustees of the Trust have the authority to issue additional series of
shares and to designate the relative rights and preferences as between the
different series. Each share of each Fund has equal rights with each other share
of the Fund as to voting, dividends and liquidation. If more than one series of
shares were issued and a series were unable to meet its obligations, the
remaining series might have to assume the unsatisfied obligations of that
series. All shares issued and outstanding will be fully paid and non-assessable
by the Fund and redeemable as described in this Statement of Additional
Information and in the Fund's prospectuses.
The Trustees of the Trust, 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 the Trust received for the issue or sale of the
shares of each series and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are specifically allocated to such
series and constitute the underlying assets of such series. The underlying
assets of each series are segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a 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 the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust, 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 the Trust 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
the Trust have the discretion to retain the current distribution arrangement
while investing in a master fund in a master/feeder fund structure if the Board
determines that the objectives of a Fund would be achieved more efficiently
thereby.
Each Fund's Declaration of Trust provides that obligations of the Fund
involved are not binding upon the Trustees individually but only upon the
property of that Fund, that the Trustees and officers will not be liable for
errors of judgment or mistakes of fact or law, and that the Fund involved will
indemnify its Trustees and officers
50
<PAGE>
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.
The Fund's activities are supervised by the Trust's Board of Trustees. The
Trust adopted a plan on April 19, 2000 pursuant to Rule 18f-3 under the 1940 Act
((the "Plan") to permit the Trust to establish a multiple class distribution
system for the Funds.
Under the Plan, shares of each class represent an equal pro rata interest
in the Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (1) each class shall have a different
designation; (2) each class of shares shall bear its own "class expenses;" (3)
each class shall have exclusive voting rights on any matter submitted to
shareholders that relates to its administrative services, shareholder services
or distribution arrangements; (4) each class shall have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class; (5) each class may have separate
and distinct exchange privileges; (6) each class may have different conversion
features; and (7) each class may have separate account size requirements.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such shares
(or class of shares) shall be entitled to vote. Shareholders of the Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Trustees has determined that the matter affects only
the interest of shareholders of one or more classes of the Fund, in which case
only the shareholders of such class or classes of the Fund shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940
Act, or any successor rule, and in the Trust's Declaration of Trust. As used in
the Prospectus and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Trust and all additional
portfolios (e.g., election of directors), means the vote of the lesser of (i)
67% of the Trust's shares represented at a meeting if the holders of more than
50% of the outstanding shares are present in person or by proxy, or (ii) more
than 50% of the Fund's outstanding shares. The term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting a single Fund or any other single portfolio (e.g., annual approval of
investment management contracts), means the vote of the lesser of (i) 67% of the
shares of the portfolio represented at a meeting if the holders of more than 50%
of the outstanding shares of the portfolio are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A: [INSERT CUSIP NUMBER]
Class B: [INSERT CUSIP NUMBER]
Class C: [INSERT CUSIP NUMBER]
The Fund has a fiscal year ending May 31, 2000.
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Advisor in light of the Fund's investment objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110.
The firm of Willkie Farr & Gallagher is legal counsel for each Fund.
51
<PAGE>
The name "Scudder Tax Free Trust" is the designation of the Trust for the
time being under an Amended and Restated Declaration of Trust dated December 8,
1987, 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.
The Fund's Shares prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which the Fund has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statement for further
information with respect to the Fund and the securities offered hereby. The
Registration Statement and its amendments are available for inspection by the
public at the SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated May 31, 2000, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
52
<PAGE>
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high grade bonds.
Together with securities rated A and Baa, they comprise investment grade
securities. Moody's states that Aa bonds are rated lower than the best bonds
because margins of protection or other elements make long-term risks appear
somewhat larger than for Aaa municipal bonds. Municipal bonds which are rated A
by Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A rated municipal bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Securities rated Baa are considered medium grade, with factors giving security
to principal and interest adequate at present but may be unreliable over any
period of time. Such bonds have speculative elements as well as investment grade
characteristics. Securities rated Ba or below by Moody's are considered below
investment grade. Moody's judges municipal bonds rated Ba to have speculative
elements, with very moderate protection of interest and principal payments and
thereby not well safeguarded under any future conditions. Municipal bonds rated
B by Moody's generally lack characteristics of desirable investments. Long-term
assurance of the contract terms of B-rated municipal bonds, such as interest and
principal payments, may be small. Securities rated Ba or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High grade), A (Good grade), BBB (Investment grade), BB (Below investment
grade) and B. Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions. Bonds rated BBB have an adequate capacity to pay interest
and to repay principal. Adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds of this category than for bonds of higher rated categories.
Securities rated BB or below by S&P are considered below investment grade. Debt
rated BB by S&P faces major ongoing uncertainties or exposure to adverse
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Municipal bonds rated B have a greater vulnerability to
default but currently have the capacity to meet interest payments and principal
repayments. Securities rated BB or below are commonly referred to as "junk"
bonds and as such they carry a high margin of risk.
S&P's top ratings for municipal notes are SP1 and SP2. The designation SP1
indicates a very strong capacity to pay principal and interest. A "+" is added
for those issues determined to possess overwhelming safety characteristics. An
SP2 designation indicates a satisfactory capacity to pay principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A, BBB,
BB and B. Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F1+. Bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to
53
<PAGE>
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.
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.
54
<PAGE>
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 AMT.
8. Net Asset Value Per Share
The value of each share of each Fund for purposes of sales and
redemptions.
9. Net Investment Income
The net investment income of a Fund is comprised of its interest
income, including accretion of original issue discounts, less
amortization of premiums and expenses paid or accrued computed under
Generally Accepted Accounting Principles (GAAP).
10. Par Value
Par value of a bond is a dollar amount representing the denomination
and assigned value of the bond. It signifies the dollar value on
which interest on the bonds is computed and is usually the same as
face value and maturity value for an individual bond. For example,
most bonds are issued in $1,000 denominations and they have a face
value, maturity value and par value of $1,000. Their market price
can of course vary significantly from $1,000 during their life
between issuance and maturity.
11. Series
Scudder Medium Term Tax Free Fund is in one investment company --
Scudder Tax Free Trust.
55
<PAGE>
SCUDDER TAX FREE TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <C> <C>
(a) (1) Amended and Restated Declaration of Trust, dated December 8, 1987, is
incorporated by reference to Post-Effective Amendment No. 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.
(5) Establishment and Designation of Classes of Shares of Beneficial Interest,
$.01 Par Value, Scudder Medium Term Tax Free Fund - Class S Shares and
Scudder Medium Term Tax Free Fund - AARP Shares, dated April 19, 2000 is
incorporated by reference to Post-Effective Amendment No. 34 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.
(4) Amendment, dated February 7, 2000, to the By-laws of the Registrant is
incorporated by reference to Post-Effective Amendment No. 35 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.
2
<PAGE>
(3) Form of Amended and Restated Investment Management Agreement between the
Registrant, on behalf of Scudder Medium Term Tax Free Fund, and Scudder
Kemper Investments, Inc., dated July 31, 2000, is incorporated by reference
to Post-Effective Amendment No. 35 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.
(2) Underwriting Agreement between the Registrant and Scudder Investor Services,
Inc., dated May 8, 2000is incorporated by reference to Post-Effective
Amendment No. 34 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-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.
3
<PAGE>
(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.
(5) Form of Administrative Services Agreement (and Fee Schedule thereto) between
the Registrant, on behalf of Scudder Medium Term Tax Free Fund, and Scudder
Kemper, Investments, Inc., dated October 2, 2000, is incorporated by
reference to Post-Effective Amendment No. 35 to the Registration Statement..
(i) Opinion and Consent of Legal Counsel to be filed by amendment.
(j) Consent of Independent Accountants to be filed by amendment.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) (1) Amended and Restated Plan With Respect to Scudder Medium Term Tax Free Fund
Pursuant to Rule 18f-3, dated May 8, 2000 is incorporated by reference to
Post-Effective Amendment No. 34 to the Registration Statement.
(p) (1) Scudder Kemper Investments, Inc. Code of Ethics is incorporated by reference
to Post-Effective Amendment No. 34 to the Registration Statement.
(2) Code of Ethics of Scudder Tax Free Trust is incorporated by reference to
Post-Effective Amendment No. 34 to the Registration Statement.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
-------- --------------------------------------------------------
None
Item 25. Indemnification.
-------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper 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
4
<PAGE>
liability whatsoever to any Person in connection with Trust
Property or the acts, obligations or affairs of the Trust. No
Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever to any Person,
other than to the Trust or its Shareholders, in connection
with Trust Property or the affairs of the Trust, save only
that arising from bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties with respect to
such Person; and all such Persons shall look solely to the
Trust Property for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of
the Trust, is made a party to any suit or proceeding to
enforce any such liability of the Trust, he shall not, on
account thereof, be held to any personal liability. The Trust
shall indemnify and hold each Shareholder harmless from and
against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder for all
legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The
indemnification and reimbursement required by the preceding
sentence shall be made only out of the assets of the one or
more Series of which the Shareholder who is entitled to
indemnification or reimbursement was a Shareholder at the time
the act or event occurred which gave rise to the claim against
or liability of said Shareholder. The rights accruing to a
Shareholder under this Section 4.1 shall not impair any other
right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided
herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(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:
5
<PAGE>
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may
be insured against by policies maintained by the Trust, shall
be severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall insure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a
defense to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section 4.3 may
be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under this Section
4.3, provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is not (i) an
"Interested Person" of the Trust (including anyone who has been exempted from
being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser
-------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
6
<PAGE>
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments,
Inc.**
Director and Chairman, Scudder Investments (Luxembourg) S.A.#
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director, Scudder Kemper Investments, Inc.**
Vice President, Scudder, Stevens & Clark Corporation **
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
7
<PAGE>
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Vice President, Chief Legal Officer and Secretary, Kemper Distributors, Inc.
Director and Secretary, Kemper Service Company
Director, Senior Vice President, Chief Legal Officer & Assistant Clerk, Scudder
Investor Services, Inc.
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director and Secretary, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc. ###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. @
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
8
<PAGE>
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Threadneedle International Ltd.
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings Ltd.
</TABLE>
* Two International Place, Boston, MA
@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@@ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo One South Place, 5th Floor, London EC2M 2ZS England
ooo One Exchange Square, 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
x Level 3, Five Blue Street, North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- ----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
9
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
<S> <C> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154-0010
Ann P. Burbank Vice President None
Two International Place
Boston, MA 02110-4103
Mark S. Casady President, Director and Assistant None
Two International Place Treasurer
Boston, MA 02110-4103
Linda C. Coughlin Director and Senior Vice President Trustee and President
Two International Place
Boston, MA 02110-4103
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154-0010
William F. Glavin Vice President None
Two International Place
Boston, MA 02110-4103
Robert J. Guerin Vice President None
Two International Place
Boston, MA 02110-4103
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110-4103
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154-0010
Kimberly S. Nassar Vice President None
Two International Place
Boston, MA 02110-4103
Gloria S. Nelund Vice President None
345 Park Avenue
New York, NY 10154-0010
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110-4103
10
<PAGE>
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110-4103
Kevin G. Poole Vice President None
Two International Place
Boston, MA 02110-4103
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President and
345 Park Avenue Legal Officer and Assistant Clerk Assistant Secretary
New York, NY 10154-0010
Howard S. Schneider Vice President None
Two International Place
Boston, MA 02110-4103
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110-4103
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
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.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant pursuant to Rule 485(a) under the
Securities Act of 1933 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
30th day of October 2000.
TAX FREE TRUST
By /s/ John Millette
-----------------
John Millette
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Linda C. Coughlin
--------------------------------------
Linda C. Coughlin Trustee and President (Chief October 30, 2000
Executive Officer)
/s/ Henry P. Becton, Jr.
--------------------------------------
Henry P. Becton, Jr.* Trustee October 30, 2000
/s/Dawn-Marie Driscoll
--------------------------------------
Dawn-Marie Driscoll* Trustee October 30, 2000
/s/ Edgar R. Fiedler
--------------------------------------
Edgar R. Fiedler * Trustee October 30, 2000
/s/ Keith R. Fox
--------------------------------------
Keith R. Fox* Trustee October 30, 2000
/s/ Joan E. Spero
--------------------------------------
Joan E. Spero* Trustee October 30, 2000
/s/ Jean Gleason Stromberg
--------------------------------------
Jean Gleason Stromberg * Trustee October 30, 2000
/s/ Jean C. Tempel
--------------------------------------
Jean C. Tempel* Trustee October 30, 2000
/s/ Steven Zaleznick
--------------------------------------
Steven Zaleznick* Trustee October 30, 2000
/s/ John R. Hebble
--------------------------------------
John R. Hebble Treasurer (Chief Financial Officer) October 30, 2000
</TABLE>
<PAGE>
*By: /s/ John Millette
-----------------
John Millette**,
Secretary
**Attorney-in-fact pursuant to powers of
attorney for Dawn-Marie Driscoll and Jean C.
Tempel, contained in the signature pages of
Post-Effective Amendment No. 32 to the
Registration Statement, filed on July 19,
1999, and pursuant to powers of attorney for
Henry P. Becton, Jr., Linda C. Coughlin,
Edgar R. Fiedler, Keith R. Fox, Joan E.
Spero, Jean Gleason Stromberg and Steven
Zaleznick, contained in and incorporated by
reference to Post-Effective Amendment #34.
<PAGE>
<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. 36
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 36
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER TAX FREE TRUST
<PAGE>
SCUDDER TAX FREE TRUST
EXHIBIT INDEX
