<PAGE>
SCUDDER INVESTMENT LOGO
IMPORTANT NEWS FOR
SCUDDER LIMITED TERM TAX FREE FUND SHAREHOLDERS
While we encourage you to read the full text of the enclosed Proxy
Statement/Prospectus, here's a brief overview of some matters affecting your
Fund that will be the subject of a shareholder vote.
Q & A: QUESTIONS AND ANSWERS
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to vote on a proposed combination of your Fund into
Scudder Medium Term Tax Free Fund. This proposal is part of a larger effort
to restructure the Scudder Family of Funds. THE BOARD OF YOUR FUND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THIS PROPOSAL.
Q: WHY HAS THE BOARD RECOMMENDED THAT I VOTE IN FAVOR OF THE COMBINATION?
A: The Board of your Fund is recommending that shareholders vote in favor of
this proposal for the following reasons:
- LOWER EXPENSES. The combination of the two Funds is expected to result in
REDUCED expenses for shareholders of your Fund.
- GREATER PREDICTABILITY OF EXPENSES. As part of the proposal to combine
funds, a new fixed administrative fee rate arrangement would be
implemented. The arrangement protects shareholders from most
administrative expense increases for a minimum of three years.
- LARGER FUND. The combined fund would likely have the ability to effect
portfolio transactions on more favorable terms and provide Scudder Kemper
Investments, the investment manager of each Fund, with greater investment
flexibility and the ability to increase diversification through the
purchase of portfolio issues.
- TAX-FREE REORGANIZATION. It is a condition of the proposed combination
that your Fund receive an opinion of tax counsel that the transaction
would be a TAX-FREE transaction.
<PAGE>
Q: WHAT ARE THE DIFFERENCES BETWEEN MY FUND AND SCUDDER MEDIUM TERM TAX FREE
FUND?
A: Although the investment objectives, policies and restrictions of your Fund
and Scudder Medium Term Tax Free Fund are similar, there are some
differences between the Funds. Although both Funds invest primarily in
high-grade municipal bonds, the average maturity (time before principal is
due on a bond) of each Fund's portfolio is different. Your Fund invests in
bonds with a dollar-weighted average maturity between one and five years
(and always invests in securities with maturities of ten years or less),
while the Medium Term Tax Free Fund invests in bonds with a dollar-weighted
average maturity between five and ten years (and always invests in
securities with maturities of 15 years or less). By investing in bonds with
longer maturities, Medium Term Tax Free Fund may be able to generate higher
returns, but this may also result in somewhat greater volatility in the
Fund's net asset value. Both Funds have the same portfolio managers and are
managed in a substantially similar manner.
Q: ARE THERE OTHER PROPOSALS I WILL BE VOTING ON?
A: You are also being asked to vote on the election of Board members for your
Fund. As part of a larger effort to restructure the Scudder Family of Funds,
the Board of your Fund has voted in favor of creating a single board of
trustees/directors responsible for most Scudder Funds. It is the Board's
belief that this has the potential for increasing efficiency and benefiting
fund shareholders. The Board also believes that a single board, responsible
for overseeing most of the no-load funds advised by Scudder Kemper, can more
effectively represent shareholder interests. THE BOARD OF YOUR FUND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH NOMINEE.
You are also being asked to ratify the selection of PricewaterhouseCoopers
LLP as the independent accountants of your Fund for the current fiscal year.
THE BOARD OF YOUR FUND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THIS
PROPOSAL.
Q: WHEN WILL THESE CHANGES TAKE EFFECT?
A: The Board expects that the proposed changes will take effect during the third
calendar quarter of this year if the proposed combination is approved.
Q: WHOM SHOULD I CALL FOR MORE INFORMATION ABOUT THIS PROXY STATEMENT?
A: Please call Shareholder Communications Corporation, your Fund's information
agent, at 1-800-603-1915.
<PAGE>
April 18, 2000
Dear Shareholder,
To continue to provide you with the highest level of investment management
and service, we're making some important changes to the Scudder Funds. Scudder
Kemper Investments, with the strong support of your Fund's Board, is proposing a
series of measures to streamline the Scudder Family of Funds. The goals are to
reduce costs and make Scudder's lineup of fund offerings easier for investors to
utilize and understand. We believe these proposals will benefit Scudder Fund
shareholders over time. We need your participation in order to make the
necessary changes.
Along with this letter, you'll find a packet of materials that we ask you to
read and, where applicable, fill out and return to us. The Q&A that begins on
the front cover of the proxy statement explains the proposals we're making, why
we're making them, and how they apply to your Scudder Fund. The packet also
contains a proxy card and a prospectus for the fund we are proposing to merge
your Fund into.
After careful review, the members of your Fund's Board have unanimously
approved each of the proposals explained in the Q&A and described in the proxy
statement. THE BOARD RECOMMENDS THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY
AND THEN VOTE FOR ALL THE PROPOSALS. (Because many of the funds for which
Scudder Kemper acts as investment manager are holding shareholder meetings, you
may receive more than one proxy card. If so, please vote each one.)
Your vote is important to us. Once you've voted, please sign and date the
proxy card and return it in the enclosed postpaid envelope; or help us save time
and postage cost by voting on the Internet or by telephone -- the enclosed flyer
describes how. If we do not hear from you by May 17, our proxy solicitor may
contact you.
Thank you for your response and for your continued investment in the Scudder
Funds.
Respectfully,
<TABLE>
<S> <C>
[/S/ EDMOND D. VILLANI] [/S/ LIN COUGHLIN]
Edmond D. Villani Linda C. Coughlin
Chief Executive Officer President
Scudder Kemper Investments, Inc. Scudder Tax Free Trust
</TABLE>
<PAGE>
SCUDDER LIMITED TERM TAX FREE FUND
--------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
SCUDDER TAX FREE TRUST
Please take notice that a Special Meeting of Shareholders (the "Meeting") of
Scudder Limited Term Tax Free Fund (the "Fund"), a series of Scudder Tax Free
Trust (the "Trust"), will be held at the offices of Scudder Kemper Investments,
Inc., 13th Floor, Two International Place, Boston, MA 02110-4103, on July 13,
2000, at 3:00 p.m., Eastern time, for the following purposes:
<TABLE>
<S> <C>
PROPOSAL 1: To elect Trustees of the Trust;
PROPOSAL 2: To approve an Agreement and Plan of Reorganization for
the Fund whereby all or substantially all of the assets
and liabilities of the Fund would be acquired by Scudder
Medium Term Tax Free Fund in exchange for shares of the
S Class of Scudder Medium Term Tax Free Fund; and
PROPOSAL 3: To ratify the selection of PricewaterhouseCoopers LLP as
the independent accountants for the Fund for the Fund's
current fiscal year.
</TABLE>
The appointed proxies will vote in their discretion on any other business
that may properly come before the Meeting or any adjournments thereof.
Holders of record of shares of the Fund at the close of business on
April 17, 2000 are entitled to vote at the Meeting and at any adjournments
thereof.
In the event that the necessary quorum to transact business or the vote
required to approve any Proposal is not obtained at the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting in
accordance with applicable law to permit further solicitation of proxies. Any
such adjournment as to a matter will require the affirmative vote of the holders
of a majority of the Fund's shares present in person or by proxy at the Meeting.
The persons named as proxies will vote FOR any such adjournment those proxies
which they are entitled to vote in favor of that Proposal and will vote AGAINST
any such adjournment those proxies to be voted against that Proposal.
By Order of the Board,
/s/ John Millette
John Millette
Secretary
April 18, 2000
IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND
RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE (OR TO TAKE
ADVANTAGE OF THE ELECTRONIC OR TELEPHONIC VOTING PROCEDURES DESCRIBED ON THE
PROXY CARD(S)). YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) (OR YOUR VOTING
BY OTHER AVAILABLE MEANS) MAY SAVE THE NECESSITY AND EXPENSE OF FURTHER
SOLICITATIONS. IF YOU WISH TO ATTEND THE MEETING AND VOTE YOUR SHARES IN PERSON
AT THAT TIME, YOU WILL STILL BE ABLE TO DO SO.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................ 1
PROPOSAL 1: ELECTION OF TRUSTEES OF THE ACQUIRED TRUST...... 3
PROPOSAL 2: APPROVAL OF AGREEMENT AND PLAN OF
REORGANIZATION............................................ 14
SYNOPSIS....................................... 14
PRINCIPAL RISK FACTORS......................... 25
THE PROPOSED TRANSACTION....................... 26
PROPOSAL 3: RATIFICATION OR REJECTION OF THE SELECTION OF
INDEPENDENT ACCOUNTANTS................................... 32
ADDITIONAL INFORMATION...................................... 33
</TABLE>
i
<PAGE>
PROXY STATEMENT/PROSPECTUS
APRIL 18, 2000
RELATING TO THE ACQUISITION OF THE ASSETS OF SCUDDER LIMITED TERM TAX FREE FUND
(THE "ACQUIRED FUND"),
A SEPARATE SERIES OF SCUDDER TAX FREE TRUST
(THE "TRUST")
TWO INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-4103
(800) 728-3337
--------------------------
BY AND IN EXCHANGE FOR THE S CLASS OF SHARES OF BENEFICIAL INTEREST OF SCUDDER
MEDIUM TERM TAX FREE FUND (THE "ACQUIRING FUND"), A SEPARATE SERIES OF
THE TRUST
TWO INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-4103
(800) 728-3337
--------------------------
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to shareholders of the
Acquired Fund in connection with three proposals (each a "Proposal,"
collectively, the "Proposals"). Proposal 1 describes the election of Trustees,
and Proposal 3 proposes the ratification of the selection of the Acquired Fund's
accountants.
In Proposal 2, shareholders are asked to approve a proposed reorganization
in which all or substantially all of the assets of the Acquired Fund would be
acquired by the Acquiring Fund, in exchange for shares of beneficial interest of
the S Class of the Acquiring Fund ("S Class Shares") and the assumption by the
Acquiring Fund of all of the liabilities of the Acquired Fund, as described more
fully below (the "Reorganization"). Shares of the Acquiring Fund thereby
received would then be distributed to the shareholders of the Acquired Fund in
complete liquidation of the Acquired Fund. As a result of the Reorganization,
each shareholder of the Acquired Fund would receive that number of
S Class Shares having an aggregate net asset value equal to the aggregate net
asset value of such shareholder's shares of the Acquired Fund held as of the
close of business on the business day preceding the closing of the
Reorganization (the "Valuation Date"). Shareholders of the Acquired Fund will
vote on an
--------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Agreement and Plan of Reorganization (the "Plan") pursuant to which the
Reorganization would be consummated. A copy of the Plan is attached hereto as
Exhibit A. The closing of the Reorganization (the "Closing") is contingent upon
shareholder approval of the Plan. The Reorganization is expected to occur on or
about July 31, 2000.
Proposals 1 and 2 relate to a restructuring program proposed by Scudder
Kemper Investments, Inc. ("Scudder Kemper" or the "Investment Manager"), and
described in more detail below.
In the descriptions of the Proposals below, the word "fund" is sometimes
used to mean an investment company or series thereof in general, and not the
Acquired Fund whose proxy statement this is. In addition, for simplicity,
actions are described in this Proxy Statement/Prospectus as being taken by
either the Acquired Fund or the Acquiring Fund (each a "Fund" and collectively
the "Funds"), although all actions are actually taken by the Trust, on behalf of
the applicable Fund.
This Proxy Statement/Prospectus sets forth concisely the information about
the Acquiring Fund that a prospective investor should know before investing and
should be retained for future reference. For a more detailed discussion of the
investment objective, policies, restrictions and risks of the Acquiring Fund,
see the Acquiring Fund's prospectus, dated October 1, 1999, as supplemented from
time to time, which is included herewith and incorporated herein by reference.
For a more detailed discussion of the investment objective, policies,
restrictions and risks of the Acquired Fund, see the Acquired Fund's prospectus,
dated October 1, 1999, as supplemented from time to time, which is incorporated
herein by reference and a copy of which may be obtained upon request and without
charge by calling or writing the Acquired Fund at the telephone number or
address set forth on the preceding page.
The Acquiring Fund's statement of additional information, dated October 1,
1999, as supplemented from time to time, is incorporated herein by reference and
may be obtained upon request and without charge by calling or writing the
Acquiring Fund at the telephone number or address set forth on the preceding
page. A Statement of Additional Information dated April 18, 2000, containing
additional information about the Reorganization and the parties thereto has been
filed with the Securities and Exchange Commission (the "SEC" or the
"Commission") and is incorporated by reference into this Proxy
Statement/Prospectus. A copy of the Statement of Additional Information relating
to the Reorganization is available upon request and without charge by calling or
writing the Acquiring Fund at the telephone number or address set forth on the
preceding page. Shareholder inquiries regarding either Fund may
2
<PAGE>
be made by calling (800) 728-3337. The information contained herein concerning
the Acquired Fund has been provided by, and is included herein in reliance upon,
the Acquired Fund. The information contained herein concerning the Acquiring
Fund has been provided by, and is included herein in reliance upon, the
Acquiring Fund. It is anticipated that existing Acquiring Fund shares will be
redesignated as S Class Shares. (Please see "Description of the Securities to be
Issued" below.)
The Acquiring Fund and the Acquired Fund are diversified series of shares of
beneficial interest of the Trust. The Trust is an open-end management investment
company organized as a Massachusetts business trust.
The Board of Trustees (except as otherwise noted, "Trustees" refers to the
Trustees of the Trust and "Board" refers to the Board of Trustees of the Trust)
is soliciting proxies from shareholders of the Acquired Fund, on behalf of the
Acquired Fund, for the Special Meeting of Shareholders to be held on July 13,
2000, at Scudder Kemper's offices, 13th Floor, Two International Place, Boston,
MA 02110-4103, at 3:00 p.m. (Eastern time), or at such later time made necessary
by adjournment (the "Meeting"). This Proxy Statement/Prospectus, the Notice of
Special Meeting and the proxy card(s) are first being mailed to shareholders on
or about April 18, 2000 or as soon as practicable thereafter.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
NOMINEES LISTED IN PROPOSAL 1, AND FOR PROPOSALS 2 AND 3.
PROPOSAL 1: ELECTION OF TRUSTEES OF THE TRUST
At the Meeting, shareholders will be asked to elect nine individuals to
constitute the Board of Trustees of the Trust. These individuals were nominated
after a careful and deliberate selection process by the present Board of
Trustees of the Trust. The nominees for election, who are listed below, include
seven persons who currently serve as Independent Trustees (as defined below) of
the Trust or as independent trustees or directors of other no-load funds advised
by Scudder Kemper and who have no affiliation with Scudder Kemper or the
American Association of Retired Persons ("AARP"). The nominees listed below are
also being nominated for election as trustees or directors of all of the other
AARP Funds (as defined below) and open-end, directly-distributed, no-load
Scudder Funds.
Currently, five different boards of trustees or directors are responsible
for overseeing different groups of no-load funds advised by Scudder Kemper. As
part of a broader restructuring effort described below under Proposal 2, Scudder
Kemper has recommended, and the Board of Trustees has agreed, that shareholder
interests can more effectively be represented by a single board with
3
<PAGE>
responsibility for overseeing substantially all of the Scudder no-load funds.
Creation of a single, consolidated board should also provide certain
administrative efficiencies and potential future cost savings for both the Funds
and Scudder Kemper.
Election of each of the listed nominees for Trustee on the Board of the
Trust requires the affirmative vote of a plurality of the votes cast at the
Meeting, in person or by proxy. The persons named as proxies on the enclosed
proxy card(s) will vote for the election of the nominees named below unless
authority to vote for any or all of the nominees is withheld in the proxy. Each
Trustee so elected will serve as a Trustee of the Trust until the next meeting
of shareholders, if any, called for the purpose of electing Trustees and until
the election and qualification of a successor or until such Trustee sooner dies,
resigns or is removed as provided in the governing documents of the Trust. Each
of the nominees has indicated that he or she is willing to serve as a Trustee.
If any or all of the nominees should become unavailable for election due to
events not now known or anticipated, the persons named as proxies will vote for
such other nominee or nominees as the current Trustees may recommend. The
following paragraphs and table set forth information concerning the nominees and
the Trustees not standing for re-election. Each nominee's or Trustee's age is in
parentheses after his or her name. Unless otherwise noted, (i) each of the
nominees and Trustees has engaged in the principal occupation(s) noted in the
following paragraphs and table for at least the most recent five years, although
not necessarily in the same capacity, and (ii) the address of each nominee is
c/o Scudder Kemper Investments, Inc., Two International Place, Boston, MA
02110-4103.
NOMINEES FOR ELECTION AS TRUSTEES:
HENRY P. BECTON, JR. (56)
Henry P. Becton, Jr. is president of the WGBH Educational Foundation, producer
and distributor of public broadcasting programming and educational and
interactive software. He graduated from Yale University in 1965, where he was
elected to Phi Beta Kappa. He received his J.D. degree CUM LAUDE from Harvard
Law School in 1968. Mr. Becton is a member of the PBS Board of Directors, a
Trustee of American Public Television, the New England Aquarium, the Boston
Museum of Science, Concord Academy, and the Massachusetts Corporation for
Educational Telecommunications, an Overseer of the Boston Museum of Fine Arts,
and a member of the Board of Governors of the Banff International Television
Festival Foundation. He is also a Director of Becton Dickinson and Company and
A.H. Belo Company, a Trustee of the Committee for Economic Development, and a
member of the Board of Visitors of the
4
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Dimock Community Health Center, the Dean's Council of Harvard University's
Graduate School of Education, and the Massachusetts Bar. Mr. Becton is a Trustee
of the Trust and has served as a trustee or director of various mutual funds
advised by Scudder Kemper since 1990.
LINDA C. COUGHLIN (48)*
Linda C. Coughlin, a Managing Director of Scudder Kemper, is head of Scudder
Kemper's U.S. Retail Mutual Funds Business. Ms. Coughlin joined Scudder Kemper
in 1986 and was a member of the firm's Board of Directors. She currently
oversees the marketing, service and operations of Scudder Kemper retail
businesses in the United States, which include the Scudder, Kemper, AARP, and
closed-end fund families, and the direct and intermediary channels. She also
serves as Chairperson of the AARP Investment Program from Scudder and as a
Trustee of the Program's mutual funds. Ms. Coughlin is also a member of the
Mutual Funds Management Group. Previously, she served as a regional Marketing
Director in the retail banking division of Citibank and at the American Express
Company as Director of Consumer Marketing for the mutual fund group.
Ms. Coughlin received a B.A. degree in economics SUMMA CUM LAUDE from Fordham
University. Ms. Coughlin is a Trustee of the Trust and has served on the boards
of various funds advised by Scudder Kemper, including the AARP Investment
Program Funds, since 1996.
DAWN-MARIE DRISCOLL (53)
Dawn-Marie Driscoll is an Executive Fellow and Advisory Board member of the
Center for Business Ethics at Bentley College, one of the nation's leading
institutes devoted to the study and practice of business ethics. Ms. Driscoll is
also president of Driscoll Associates, a consulting firm. She is a member of the
Board of Governors of the Investment Company Institute and serves as Chairman of
the Directors Services Committee. Ms. Driscoll was recently named 1999 "Fund
Trustee of the Year" by Fund Directions, a publication of Institutional
Investor, Inc. She has been a director, trustee and overseer of many civic and
business institutions, including The Massachusetts Bay United Way and Regis
College. Ms. Driscoll was formerly a law partner at Palmer & Dodge in Boston and
served for over a decade as Vice President of Corporate Affairs and General
Counsel of Filene's, the Boston-based department store chain. Ms. Driscoll
received a B.A. from Regis College, a J.D. from Suffolk University Law School, a
D.H.L. (honorary) from Suffolk University and a D.C.S. (honorary) from Bentley
College Graduate School of Business. Ms. Driscoll is a Trustee of the Trust and
has served as a trustee or director of various mutual funds advised by Scudder
Kemper since 1987.
5
<PAGE>
EDGAR R. FIEDLER (70)
Edgar R. Fiedler is Senior Fellow and Economic Counsellor at The Conference
Board. He served as the Board's Vice President, Economic Research from 1975 to
1986 and as Vice President and Economic Counsellor from 1986 to 1996.
Mr. Fiedler's business experience includes positions at Eastman Kodak in
Rochester (1956-59), Doubleday and Company in New York City (1959-60), and
Bankers Trust Company in New York City (1960-69). He also served as Assistant
Secretary of the Treasury for Economic Policy from 1971 to 1975. Mr. Fiedler
graduated from the University of Wisconsin in 1951. He received his M.B.A. from
the University of Michigan and his doctorate from New York University. During
the 1980's, Mr. Fiedler was an Adjunct Professor of Economics at the Columbia
University Graduate School of Business. From 1990 to 1991, he was the Stephen
Edward Scarff Distinguished Professor at Lawrence University in Wisconsin.
Mr. Fiedler is a Director of The Stanley Works, Harris Insight Funds, Brazil
Fund, and PEG Capital Management, Inc. He has served as a board member of
various mutual funds advised by Scudder Kemper, including the AARP Investment
Program Funds, since 1984.
KEITH R. FOX (46)
Keith R. Fox is the managing partner of the Exeter Group of Funds, a series of
private equity funds with offices in New York and Boston, which he founded in
1986. The Exeter Group invests in a wide range of private equity situations,
including venture capital, expansion financings, recapitalizations and
management buyouts. Prior to forming Exeter, Mr. Fox was a director and vice
president of BT Capital Corporation, a subsidiary of Bankers Trust New York
Corporation organized as a small business investment company and based in New
York City. Mr. Fox graduated from Oxford University in 1976 and in 1981 received
an M.B.A. degree from the Harvard Business School. Mr. Fox is also a qualified
accountant. He is a board member and former Chairman of the National Association
of Small Business Investment Companies, and a director of Golden State Vintners,
K-Communications, Progressive Holding Corporation and Facts On File, as well as
a former director of over twenty companies. Mr. Fox has served as a trustee or
director of various mutual funds advised by Scudder Kemper since 1996.
JOAN EDELMAN SPERO (55)
Joan E. Spero is the president of the Doris Duke Charitable Foundation, a
position to which she was named in January 1997. From 1993 to 1997, Ms. Spero
served as Undersecretary of State for Economic, Business and Agricultural
Affairs under President Clinton. From 1981 to 1993, she was an executive at the
6
<PAGE>
American Express Company, where her last position was executive vice president
for Corporate Affairs and Communications. Ms. Spero served as U.N. Ambassador to
the United Nations Economic and Social Council under President Carter from 1980
to 1981. She was an assistant professor at Columbia University from 1973 to
1979. She graduated Phi Beta Kappa from the University of Wisconsin and holds a
master's degree in international affairs and a doctorate in political science
from Columbia University. Ms. Spero is a member of the Council on Foreign
Relations and the Council of American Ambassadors. She also serves as a trustee
of the Wisconsin Alumni Research Foundation, The Brookings Institution and
Columbia University and is a Director of First Data Corporation. Ms. Spero has
served as a trustee or director of various mutual funds advised by Scudder
Kemper since 1998.
JEAN GLEASON STROMBERG (56)
Ms. Stromberg acts as a consultant on regulatory matters. From 1996 to 1997,
Ms. Stromberg represented the U.S. General Accounting Office before Congress and
elsewhere on issues involving banking, securities, securities markets, and
government-sponsored enterprises. Prior to that, Ms. Stromberg was a corporate
and securities law partner at the Washington, D.C. law office of Fulbright and
Jaworski, a national law firm. She served as Associate Director of the SEC's
Division of Investment Management from 1977 to 1979 and prior to that was
Special Counsel for the Division of Corporation Finance from 1972 to 1977.
Ms. Stromberg graduated Phi Beta Kappa from Wellesley College and received her
law degree from Harvard Law School. From 1988 to 1991 and 1993 to 1996, she was
a Trustee of the American Bar Retirement Association, the funding vehicle for
American Bar Association-sponsored retirement plans. Ms. Stromberg serves on the
Wellesley College Business Leadership Council and the Council for Mutual Fund
Director Education at Northwestern University Law School and was a panelist at
the SEC's Investment Company Director's Roundtable. Ms. Stromberg has served as
a board member of the AARP Investment Program Funds since 1997.
JEAN C. TEMPEL (56)
Jean C. Tempel is a venture partner for Internet Capital Group, a strategic
network of Internet partnership companies whose principal offices are in Wayne,
Pennsylvania. Ms. Tempel concentrates on investment opportunities in the Boston
area. She spent 25 years in technology/operations executive management at
various New England banks, building custody operations and real time
financial/securities processing systems, most recently as Chief Operations
Officer at The Boston Company. From 1991 until 1993 she was president/COO of
Safeguard Scientifics, a Pennsylvania technology venture company. In that
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role she was a founding investor, director and vice chairman of Cambridge
Technology Partners. She is a director of XLVision, Inc., Marathon
Technologies, Inc., Aberdeen Group and Sonesta Hotels International, and is a
Trustee of Northeastern University, Connecticut College, and The Commonwealth
Institute. She received a B.A. from Connecticut College, an M.S. from Rensselaer
Polytechnic Institute of New York, and attended Harvard Business School's
Advanced Management Program. Ms. Tempel is a Trustee of the Trust and has served
as a trustee or director of various mutual funds advised by Scudder Kemper since
1994.
STEVEN ZALEZNICK (45)*
Steven Zaleznick is President and CEO of AARP Services, Inc., a wholly-owned and
independently-operated subsidiary of AARP which manages a range of products and
services offered to AARP members, provides marketing services to AARP and its
member service providers and establishes an electronic commerce presence for
AARP members. Mr. Zaleznick previously served as AARP's general counsel for nine
years. He was responsible for the legal affairs of AARP, which included tax and
legal matters affecting non-profit organizations, contract negotiations,
publication review and public policy litigation. In 1979, he joined AARP as a
legislation representative responsible for issues involving taxes, pensions, age
discrimination, and other national issues affecting older Americans.
Mr. Zaleznick is President of the Board of Cradle of Hope Adoption Center in
Washington, D.C. He is a former treasurer and currently a board member of the
National Senior Citizens Law Center. Mr. Zaleznick received his B.A. in
economics from Brown University. He received his J.D. degree from Georgetown
University Law Center and is a member of the District of Columbia Bar
Association.
8
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TRUSTEES NOT STANDING FOR RE-ELECTION:
<TABLE>
<CAPTION>
PRESENT OFFICE WITH THE TRUST;
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME (AGE) AND DIRECTORSHIPS
- ---------- -----------------------------------
<S> <C>
Peter B. Freeman (67)................ Trustee; Corporate Director and
Trustee. Mr. Freeman serves on the
boards of various other trusts or
corporations whose funds are
advised by Scudder Kemper.
George M. Lovejoy, Jr. (70).......... Trustee; President and Director,
Fifty Associates (real estate
corporation). Mr. Lovejoy serves on
the boards of various other trusts
or corporations whose funds are
advised by Scudder Kemper.
Wesley W. Marple, Jr. (68)........... Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration. Mr. Marple serves
on the boards of various other
trusts or corporations whose funds
are advised by Scudder Kemper.
Kathryn L. Quirk (47)*............... Trustee, Vice President and
Assistant Secretary; Managing
Director of Scudder Kemper.
Ms. Quirk serves on the boards of
various other trusts or
corporations whose funds are
advised by Scudder Kemper.
</TABLE>
- ------------------------
* Nominee or Trustee considered by the Trust and its counsel to be an
"interested person" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Trust, the Investment Manager or AARP because
of his or her employment by the Investment Manager or AARP, and, in some
cases, holding offices with the Trust.
Appendix 1 hereto sets forth the number of shares of each series of the
Trust owned directly or beneficially by the Trustees of the Trust and by the
nominees for election.
9
<PAGE>
RESPONSIBILITIES OF THE BOARD -- BOARD AND COMMITTEE MEETINGS
A fund's board is responsible for the general oversight of fund business.
The board that is proposed for shareholder voting at this Meeting is comprised
of two individuals who are considered "interested" Trustees, and seven
individuals who have no affiliation with Scudder Kemper or AARP and who are
called "independent" Trustees (the "Independent Trustees"). The SEC has recently
proposed a rule that would require a majority of the board members of a fund to
be "independent" if the fund were to take advantage of certain exemptive rules
under the 1940 Act. On the proposed Board of Trustees, if approved by
shareholders, nearly 78% will be Independent Trustees. The Independent Trustees
have been nominated solely by the current Independent Trustees of the Trust, a
practice also favored by the SEC. The Independent Trustees have primary
responsibility for assuring that the Acquired Fund is managed in the best
interests of its shareholders.
The Trustees meet several times during the year to review the investment
performance of each fund of the Trust and other operational matters, including
policies and procedures designed to assure compliance with regulatory and other
requirements. In 1999, the Trustees conducted over 20 meetings to deal with fund
issues (including committee and subcommittee meetings and special meetings of
the Independent Trustees). Furthermore, the Independent Trustees review the fees
paid to the Investment Manager and its affiliates for investment advisory
services and other administrative and shareholder services. The Trustees have
adopted several policies and practices which help ensure their effectiveness and
independence in reviewing fees and representing shareholders. Many of these are
similar to those suggested in the Investment Company Institute's 1999 Report of
the Advisory Group on Best Practices for Fund Directors (the "Advisory Group
Report"). For example, the Independent Trustees select independent legal counsel
to work with them in reviewing fees, advisory and other contracts and overseeing
fund matters. The Trustees are also assisted in this regard by the funds'
independent public accountants and other independent experts retained from time
to time for this purpose. The Independent Trustees regularly meet privately with
their counsel and other advisors. In addition, the Independent Trustees from
time to time have appointed task forces and subcommittees from their members to
focus on particular matters such as investment, accounting and shareholder
servicing issues.
The Board of the Trust has an Audit Committee and a Committee on Independent
Trustees, the responsibilities of which are described below. In addition, the
Trust has an Executive Committee and a Valuation Committee.
10
<PAGE>
AUDIT COMMITTEE
The Audit Committee reviews with management and the independent public
accountants for each series of the Trust, among other things, the scope of the
audit and the internal controls of each series of the Trust and its agents,
reviews and approves in advance the type of services to be rendered by
independent accountants, recommends the selection of independent accountants for
each series of the Trust to the Board, reviews the independence of such firm
and, in general, considers and reports to the Board on matters regarding the
accounting and financial reporting practices of each series of the Trust.
As suggested by the Advisory Group Report, the Trust's Audit Committee is
comprised of only Independent Trustees (all of whom serve on the committee),
meets privately with the independent accountants of each series of the Trust,
will receive annual representations from the accountants as to their
independence, and has a written charter that delineates the committee's duties
and powers.
COMMITTEE ON INDEPENDENT TRUSTEES
The full Board of Trustees of the Trust has a Committee on Independent
Trustees, comprised of all of the Independent Trustees, charged with the duty of
making all nominations of Independent Trustees, establishing Trustees'
compensation policies, retirement policies and fund ownership policies,
reviewing Trustees' affiliations and relationships annually, and periodically
assessing and reviewing evaluations of the Board of Trustees' effectiveness.
ATTENDANCE
As noted above, the Trustees conducted over 20 meetings in calendar year
1999 to deal with fund matters, including various committee and subcommittee
meetings and special meetings of the Independent Trustees. The full Board of
Trustees of the Trust met eleven times, the Audit Committee met two times and
the Committee on Independent Trustees met one time during calendar year 1999.
Each then current Trustee attended 100% of the total meetings of the full Board
of Trustees held during calendar year 1999. In addition, each Independent
Trustee attended 100% of the total meetings of the Audit Committee and the
Committee on Independent Trustees held during that period.
11
<PAGE>
OFFICERS
The following persons are officers of the Trust:
<TABLE>
<CAPTION>
PRESENT OFFICE WITH THE TRUST;
PRINCIPAL OCCUPATION YEAR FIRST BECAME
NAME (AGE) OR EMPLOYMENT(1) AN OFFICER(2)
- ---------- ------------------------------ -----------------
<S> <C> <C>
Linda C. Coughlin (48)...... Trustee, President; Managing
Director of Scudder Kemper 2000
Kathryn L. Quirk (47)....... Trustee, Vice President and
Assistant Secretary; Managing
Director of Scudder Kemper 1997
Ashton P. Goodfield (36).... Vice President; Senior Vice
President of Scudder Kemper 1999
Ann M. McCreary (43)........ Vice President; Managing
Director of Scudder Kemper 1998
John Millette (37).......... Vice President and Secretary;
Vice President of Scudder
Kemper 1999
John R. Hebble (41)......... Treasurer; Senior Vice
President of Scudder Kemper 1998
Caroline Pearson (38)....... Assistant Secretary; Senior
Vice President of Scudder
Kemper; Associate, Dechert
Price & Rhoads (law firm) 1989
to 1997 1997
</TABLE>
- ------------------------
(1) Unless otherwise stated, all of the officers have been associated with their
respective companies for more than five years, although not necessarily in
the same capacity.
(2) The President, Treasurer and Secretary each holds office until his or her
successor has been duly elected and qualified, and all other officers hold
offices in accordance with the By-laws of the Trust.
COMPENSATION OF TRUSTEES AND OFFICERS
The Trust pays each Independent Trustee an annual Trustee's fee for each
series of the Trust plus specified amounts for Board and committee meetings
attended and reimburses expenses related to the business of any series of the
Trust. Each Independent Trustee receives an annual Trustee's fee of $2,400 per
fund if the fund's total net assets do not exceed $100 million, $4,800 per fund
if
12
<PAGE>
the fund's total net assets exceed $100 million but do not exceed $1 billion and
$7,200 per fund if the fund's total net assets exceed $1 billion. The lead
Trustee receives an additional annual retainer fee of $500 per fund. Each
Independent Trustee also receives fees of $150 per fund for attending each Board
meeting, Audit Committee meeting or other meeting held for the purpose of
considering arrangements between the Trust and Scudder Kemper, or any of its
affiliates. Each Independent Trustee also receives $75 per fund for all other
committee meetings attended. The newly-constituted Board may determine to change
its compensation structure.
The Independent Trustees of the Trust are not entitled to benefits under any
pension or retirement plan. A one-time benefit will be provided to those
Independent Trustees who have volunteered to leave the Board prior to their
normal retirement date in order to facilitate the nomination of a consolidated
board. Inasmuch as Scudder Kemper will also benefit from the administrative
efficiencies of a consolidated board, Scudder Kemper has agreed to pay one-half
of the cost of this benefit. The remaining portion, ranging from $6,161 to
$12,322 per Trustee, will be paid by the Acquired Fund.
Scudder Kemper supervises the Trust's investments, pays the compensation and
certain expenses of its personnel who serve as Trustees and officers of the
Trust and receives a management fee for its services. Several of the Trust's
officers and Trustees are also officers, directors, employees or stockholders of
Scudder Kemper and participate in the fees paid to that firm, although the Trust
makes no direct payments to them other than for reimbursement of travel expenses
in connection with their attendance at certain Board and committee meetings.
The following Compensation Table provides in tabular form the following
data:
COLUMN (1) All Trustees who receive compensation from the Trust.
COLUMN (2) Aggregate compensation received by each Trustee of the Trust
during calendar year 1999.
COLUMN (3) Total compensation received by each Trustee from funds managed by
Scudder Kemper (collectively, the "Fund Complex") during calendar year 1999.
13
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND COMPLEX
TRUSTEE (NUMBER OF SERIES) PAID TO TRUSTEE
- ------- ------------------ ---------------------
<S> <C> <C>
Henry P. Becton Jr........................... $12,310 (2 series) $140,000 (30 funds)
Dawn-Marie Driscoll.......................... $13,114 (2 series) $150,000 (30 funds)
Peter B. Freeman............................. $12,383 (2 series) $179,783 (46 funds)
George M. Lovejoy, Jr........................ $12,383 (2 series) $153,200 (31 funds)
Wesley W. Marple, Jr......................... $12,383 (2 series) $140,000 (30 funds)
Jean C. Tempel............................... $12,383 (2 series) $140,000 (30 funds)
</TABLE>
THE BOARD OF TRUSTEES OF SCUDDER TAX FREE TRUST UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF SCUDDER LIMITED TERM TAX FREE FUND VOTE FOR EACH NOMINEE.
PROPOSAL 2: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
I. SYNOPSIS
The following is a summary of certain information contained in this Proxy
Statement/Prospectus relating to the Reorganization. This summary is qualified
by reference to the more complete information contained elsewhere in this Proxy
Statement/Prospectus, the prospectuses and statements of additional information
of the Funds, and the Plan. Shareholders should read this entire Proxy
Statement/Prospectus carefully.
INTRODUCTION
The Board of the Trust, including all of the Independent Trustees, approved
the Plan at a meeting held on February 7, 2000. Subject to its approval by the
shareholders of the Acquired Fund, the Plan provides for (a) the transfer of all
or substantially all of the assets and all of the liabilities of the Acquired
Fund to the Acquiring Fund in exchange for S Class Shares; (b) the distribution
of such shares to the shareholders of the Acquired Fund in complete liquidation
of the Acquired Fund; and (c) the abolition of the Acquired Fund as a series of
the Trust. As a result of the Reorganization, each shareholder of the Acquired
Fund will become a shareholder of the S Class Shares and will hold, immediately
after the Reorganization, S Class Shares having an aggregate net asset value
equal to the aggregate net asset value of such shareholder's shares of the
Acquired Fund on the Valuation Date.
14
<PAGE>
Scudder Kemper is the investment manager of both Funds. If the
Reorganization is completed, the Acquired Fund's shareholders will continue to
enjoy all of the same shareholder privileges as they currently enjoy, such as
the ability to buy, exchange and sell shares without paying a sales commission,
access to professional service representatives, checkwriting, and automatic
dividend reinvestment. The shareholder service features of the Acquiring Fund
are identical to those of the Acquired Fund. See "Purchase, Redemption and
Exchange Information" below.
BACKGROUND OF THE REORGANIZATION
The Reorganization is part of a broader restructuring program proposed by
Scudder Kemper to respond to changing industry conditions and investor needs.
The mutual fund industry has grown dramatically over the last ten years. During
this period of rapid growth, investment managers expanded the range of fund
offerings that they make available to investors in an effort to meet the growing
and changing needs and desires of an increasingly large and dynamic group of
investors. With this expansion has come increased complexity and competition
among mutual funds, as well as increased confusion among investors. The group of
no-load funds advised by Scudder Kemper has followed this pattern, increasing
from 44 no-load funds in 1990 to 77 no-load funds at present.
As a result, Scudder Kemper has sought ways to restructure and streamline
the management and operations of the funds it advises. Scudder Kemper believes,
and has advised the boards, that the consolidation of certain funds advised by
it would benefit fund shareholders. Scudder Kemper has, therefore, proposed the
consolidation of a number of no-load funds advised by it that Scudder Kemper
believes have similar or compatible investment objectives and policies. In many
cases, the proposed consolidations are designed to eliminate the substantial
overlap in current offerings by the Scudder Funds and the funds offered through
the AARP Investment Program (the "AARP Funds"), all of which are advised by
Scudder Kemper. Consolidation plans are proposed for other funds that have not
gathered enough assets to operate efficiently and, in turn, have relatively high
expense ratios. Scudder Kemper believes that these consolidations may help to
enhance investment performance of funds and increase efficiency of operations.
The Reorganization is also expected to result in lower operating expenses for
Acquired Fund shareholders, as described in "Comparison of Expenses" below.
There are currently five different boards for the no-load funds advised by
Scudder Kemper. Scudder Kemper believes, and has proposed to the boards, that
creating a single board responsible for the AARP Funds and for the open-
15
<PAGE>
end, directly-distributed, no-load Scudder Funds would increase efficiency and
benefit fund shareholders. (See Proposal 1 above.)
As part of this restructuring effort, Scudder Kemper has also proposed the
adoption of an administrative fee for most of the no-load funds advised by
Scudder Kemper. Under this fee structure, in exchange for payment by a fund of
an administrative fee, Scudder Kemper would agree to provide or pay for
substantially all services that the fund normally requires for its operations,
other than those provided under the fund's investment management agreement and
certain other expenses. Such an administrative fee would enable investors to
determine with greater certainty the expense level that a fund will experience,
and, for the term of the administrative agreement, would transfer substantially
all of the risk of increased costs to Scudder Kemper. Scudder Kemper has
proposed that the Acquiring Fund implement such an administrative fee upon the
Closing, as described in "Administrative Fee" below.
The fund consolidations, the adoption of an administrative fee and the
creation of a single board are expected to have a positive impact on Scudder
Kemper, as well. These changes are likely to result in reduced costs (and the
potential for increased profitability) for Scudder Kemper in advising or
servicing funds.
REASONS FOR THE PROPOSED REORGANIZATION; BOARD APPROVAL
Since receiving Scudder Kemper's proposals on October 5, 1999, the
Independent Trustees have conducted a thorough review of all aspects of the
proposed restructuring program. They have been assisted in this regard by their
independent counsel and by independent consultants with special expertise in
financial and mutual fund industry matters. In the course of discussions with
representatives of Scudder Kemper, the Independent Trustees have requested, and
Scudder Kemper has accepted, numerous changes designed to protect and enhance
the interests of shareholders. See "The Proposed Transaction -- Board Approval
of the Proposed Transaction" below.
The Trustees believe that the Reorganization may provide shareholders of the
Acquired Fund with the following benefits:
- LOWER EXPENSES. If the Reorganization is approved, Acquired Fund
shareholders are expected to benefit from lower total Fund operating
expenses. Please refer to "Comparison of Expenses" below.
- GREATER PREDICTABILITY OF EXPENSES. On or prior to the Closing, the
Acquiring Fund and Scudder Kemper will enter into an administrative
services agreement pursuant to which Scudder Kemper will provide or pay
others to provide substantially all of the administrative
16
<PAGE>
services required by the Acquiring Fund, and will pay most Acquiring Fund
expenses, in return for payment by the Acquiring Fund of a single
administrative fee rate. This agreement, which has an initial three year
term, will protect the Acquiring Fund's shareholders from increases in the
Acquiring Fund's expense ratio attributed to any increases in the costs of
providing these services.
- INVESTMENT IN A LARGER FUND. Scudder Kemper has advised the Trustees that
the Acquired Fund's shareholders will benefit from an investment in a
larger fund which will likely have the ability to effect portfolio
transactions on more favorable terms and provide Scudder Kemper with
greater investment flexibility and the ability to select a larger number
of portfolio securities for the combined fund, with the attendant ability
to spread investment risks among a larger number of portfolio securities.
- TAX-FREE REORGANIZATION. It is a condition of the Reorganization that each
Fund receive an opinion of tax counsel that the transaction would be a
TAX-FREE transaction.
For these reasons, as more fully described below under "The Proposed
Transaction -- Board Approval of the Proposed Transaction," the Trustees of the
Trust, including the Independent Trustees, have concluded that:
- the Reorganization is in the best interests of the Acquired Fund and its
shareholders; and
- the interests of the existing shareholders of the Acquired Fund will not
be diluted as a result of the Reorganization.
ACCORDINGLY, THE TRUSTEES UNANIMOUSLY RECOMMEND APPROVAL OF THE PLAN
EFFECTING THE REORGANIZATION. If the Plan is not approved, the Acquired Fund
will continue in existence unless other action is taken by the Trustees.
17
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS OF THE FUNDS
The investment objectives, policies and restrictions of the Acquired Fund
and the Acquiring Fund (and, consequently, the risks of investing in either
Fund) are very similar. However, there are some differences. The investment
objective of the Acquiring Fund is to seek a high level of income free from
regular federal income taxes and to limit principal fluctuation. The investment
objective of the Acquired Fund is to seek as high a level of income exempt from
regular federal income tax as is consistent with a high degree of principal
stability. There can be no assurance that either Fund will achieve its
investment objective.
Both Funds have the same portfolio managers and are managed in a
substantially similar manner. For each Fund, the Investment Manager looks for
securities that appear to offer the best total return potential, and normally
prefers those that cannot be called in before maturity. In making buy and sell
decisions for each Fund, the Investment Manager typically weighs 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. As
described below, however, the Acquiring Fund's investments generally have longer
maturities (the time before principal is due on a bond) than the Acquired Fund's
investments.
Each Fund invests at least 80% of its net assets in securities of
municipalities across the United States and in other securities whose income is
free from regular federal income tax. Each Fund can buy many types of municipal
securities, including 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). These may also include municipal lease
obligations and investments representing an interest in municipal lease
obligations.
The Acquiring Fund invests primarily in intermediate-term, high-grade
municipal securities with a dollar-weighted average maturity (the maturity of
the Fund's portfolio) between five and ten years, while the Acquired Fund
invests primarily in shorter-term, high-grade municipal securities with a
dollar-weighted average maturity between one and five years. The Acquiring Fund
may not purchase securities with maturities of greater than 15 years, while the
Acquired Fund may not purchase securities with maturities of greater than
10 years.
Each Fund normally invests at least 65% of its net assets in municipal
securities of the top three grades of credit quality. Each Fund may invest up to
35% of its net assets in bonds rated in the fourth credit grade, which is still
18
<PAGE>
considered investment grade. Each Fund may invest up to 20% of its net assets in
securities whose income is subject to the federal alternative minimum tax. In
addition, a portion of each Fund's income may be subject to regular federal,
state and local income taxes.
The Acquiring Fund's investment restrictions are identical to the Acquired
Fund's investment restrictions, as such restrictions are set forth under
"Investment Restrictions" in each Fund's statement of additional information.
Investment restrictions of each Fund that are fundamental policies may not be
changed without the approval of Fund shareholders. Investors should refer to the
respective statements of additional information of the Funds for a fuller
description of each Fund's investment policies and restrictions.
PORTFOLIO TURNOVER
The portfolio turnover rates for the Acquiring Fund, i.e., the ratio of the
lesser of annual sales or purchases to the monthly average value of the
portfolio (excluding from both the numerator and the denominator securities with
maturities at the time of acquisition of one year or less), for the fiscal year
ended December 31, 1998 and for the five months ended May 31, 1999 were 10.8%
and 12.5% (annualized), respectively. The portfolio turnover rates for the
Acquired Fund for the fiscal year ended October 31, 1998 and for the seven
months ended May 31, 1999 were 23.2% and 5.6% (annualized), respectively.
PERFORMANCE
The following table shows how each Fund's returns over different periods
average out. For context, the table also includes broad-based market indexes
(which, unlike the Funds, do not have any fees or expenses). The performances of
both Funds and the indexes vary over time. All figures assume reinvestment of
dividends and distributions.
19
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDING DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACQUIRING ACQUIRED
FUND FUND
ACQUIRING ACQUIRED BENCHMARK BENCHMARK
FUND FUND INDEX** INDEX**
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Past year..................... (1.11)% 0.39% (2.06)% 1.98%
Past 5 years.................. 5.98% 4.87% 6.91% 5.17%
Past 10 years(*).............. 6.39% N/A 6.89% N/A
Since Inception(*)............ N/A 4.20% N/A 4.56%
</TABLE>
- ------------------------
* The inception date for the Acquired Fund is February 15, 1994. Index
comparisons begin on February 28, 1994.
** The Acquiring Fund's benchmark index is the Lehman Brothers Municipal Bond
Index, a market value-weighted measure of municipal bonds issued across the
United States. The Acquired Fund's benchmark index is the Lehman Brothers
Municipal Bond Index (3 year), an unmanaged, market value-weighted measure of
the short-term municipal bond market which includes bonds with maturities of
two to three years. Index returns are calculated monthly.
Total return for the Acquiring Fund would have been lower from 1989 through
1995 if the Investment Manager had not maintained expenses during that period.
Total return for the Acquired Fund would have been lower during all periods
noted in the table above if the Investment Manager had not maintained expenses
since inception.
There may be differences in the Funds' yields. For information regarding
each Fund's current 30-day yield, please call (800) 728-3337.
For management's discussion of the Acquiring Fund's performance for the
fiscal year ended May 31, 1999, see Exhibit B attached hereto.
INVESTMENT MANAGER; FEES AND EXPENSES
Each Fund retains the investment management firm of Scudder Kemper, pursuant
to separate contracts, to manage its daily investment and business affairs,
subject to the policies established by the Fund's Trustees. Shareholders pay no
direct charges or fees for investment management or other services. Scudder
Kemper is a Delaware corporation located at Two International Place, Boston,
Massachusetts 02110-4103.
20
<PAGE>
The Investment Manager receives a fee for its services pursuant to its
investment management agreement with the Acquiring Fund. For these services, the
Acquiring Fund pays the Investment Manager a fee at an annual rate of 0.60% of
the first $500 million of average daily net assets and 0.50% of average daily
net assets in excess of $500 million. The fee is graduated so that increases in
the Acquiring Fund's net assets may result in a lower annual fee rate and
decreases in its net assets may result in a higher annual fee rate. As of May
31, 1999, the Acquiring Fund had total net assets of $643,270,302. For the
fiscal year ended December 31, 1998 and the five months ended May 31, 1999, the
Acquiring Fund paid the Investment Manager a fee of 0.57% and 0.57%
(annualized), respectively, of average daily net assets.
The Investment Manager receives a fee pursuant to an investment management
agreement as compensation for its services on behalf of the Acquired Fund. For
these services, the Acquired Fund pays the Investment Manager a fee at an annual
rate of 0.60% of average daily net assets. As of May 31, 1999, the Acquired Fund
had total net assets of $107,303,722. For the fiscal year ended October 31, 1998
and the seven months ended May 31, 1999, the Acquired Fund paid the Investment
Manager a fee of 0.53% and 0.54% (annualized), respectively, of average daily
net assets. By contract, the Acquired Fund's total annual Fund operating
expenses are maintained at no more than 0.75% through September 30, 2000.
ADMINISTRATIVE FEE
On or prior to the Closing, the Acquiring Fund will have entered into an
administrative services agreement with Scudder Kemper (the "Administration
Agreement"), pursuant to which Scudder Kemper will provide or pay others to
provide substantially all of the administrative services required by the
Acquiring Fund (other than those provided by Scudder Kemper under its investment
management agreement with the Fund, as described above) in exchange for the
payment by the Acquiring Fund of an administrative services fee (the
"Administrative Fee") of 0.15% of average daily net assets. One effect of this
arrangement is to make the Acquiring Fund's future expense ratio more
predictable. The details of this arrangement (including expenses that are not
covered) are set out below.
Various third-party service providers (the "Service Providers"), some of
which are affiliated with Scudder Kemper, provide certain services to the
Acquiring Fund pursuant to separate agreements with the Fund, subject to
oversight and approval by the Trustees. Scudder Fund Accounting Corporation, a
subsidiary of Scudder Kemper, computes net asset value for the Acquiring Fund
and maintains its accounting records. Scudder Service Corporation, also a
21
<PAGE>
subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Acquiring Fund. Scudder Trust
Company, an affiliate of Scudder Kemper, provides subaccounting and
recordkeeping services for shareholder accounts in certain retirement and
employee benefit plans. As custodian, State Street Bank and Trust Company holds
the portfolio securities of the Acquiring Fund, pursuant to a custodian
agreement. PricewaterhouseCoopers LLP audits the financial statements of the
Acquiring Fund and provides other audit, tax, and related services. Willkie
Farr & Gallagher acts as general counsel for the Acquiring Fund. In addition to
the fees it pays under its current investment management agreement with Scudder
Kemper, the Acquiring Fund pays the fees and expenses associated with these
service arrangements as well as the Acquiring Fund's insurance, registration,
printing, postage and other costs.
Once the Administration Agreement becomes effective, each Service Provider
will continue to provide the services that it currently provides to the
Acquiring Fund, as described above, under the current arrangements, except that
Scudder Kemper will pay these entities for the provision of their services to
the Acquiring Fund and will pay most other Fund expenses including insurance,
registration, printing and postage fees. In return, the Acquiring Fund will pay
Scudder Kemper the Administrative Fee.
The proposed Administration Agreement will have an initial term of three
years, subject to earlier termination by the Trustees. The fee payable by the
Acquiring Fund to Scudder Kemper pursuant to the Administration Agreement would
be reduced by the amount of any credit received from the Acquiring Fund's
custodian for cash balances.
Certain expenses of the Acquiring Fund would not be borne by Scudder Kemper
under the Administration Agreement, such as taxes, brokerage, interest and
extraordinary expenses, and the fees and expenses of the Independent Trustees
(including the fees and expenses of their independent counsel). In addition, the
Acquiring Fund would continue to pay the fees required by its investment
management agreement with Scudder Kemper.
COMPARISON OF EXPENSES
The tables and examples below are designed to assist you in understanding
the various costs and expenses that you will bear directly or indirectly as an
investor in S Class Shares of the Acquiring Fund, and comparing these with the
expenses of the Acquired Fund. AS INDICATED BELOW, IT IS EXPECTED THAT THE TOTAL
EXPENSE RATIO OF THE ACQUIRING FUND FOLLOWING THE REORGANIZATION WILL BE LOWER
THAN THE CURRENT EXPENSE RATIO OF THE ACQUIRED FUND. Unless otherwise noted, the
information below is based on each Fund's expenses and average daily net assets
22
<PAGE>
during the twelve months ended October 31, 1999 and on a pro forma basis as of
that date and for the period then ended, giving effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
ACQUIRING ACQUIRED PRO FORMA
FUND FUND (COMBINED)
--------- -------- ----------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price)............. None None None
Maximum deferred sales charge (load) (as a
percentage of purchase price or redemption
proceeds)....................................... None None None
Maximum deferred sales charge (load) imposed on
reinvested dividends............................ None None None
Redemption fee (as a percentage of amount
redeemed, if applicable)(+)..................... None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRING ACQUIRED PRO FORMA*
FUND FUND (COMBINED)
--------- -------- ----------
<S> <C> <C> <C>
Management fees................................... 0.58% 0.60% 0.57%
Distribution and/or service (12b-1) fees.......... None None None
Other expenses.................................... 0.13% 0.30% 0.16%
Total annual Fund operating expenses.............. 0.71% 0.90% 0.73%
Expense reimbursements............................ N/A 0.15% N/A
Net annual Fund operating expenses................ N/A 0.75%(#) N/A
</TABLE>
- ------------------------
(+) There is a $5 wire service fee for receiving redemption proceeds via wire.
(#) By contract, the Acquired Fund's total annual Fund operating expenses are
maintained at no more than 0.75% through September 30, 2000. There is no
guarantee that this expense waiver will continue beyond September 30, 2000.
* Pro Forma expenses reflect the implementation of the Administrative Fee for
the Acquiring Fund to be effective upon the Reorganization.
In evaluating the Reorganization, the Independent Trustees also considered
the Acquiring Fund's and the Acquired Fund's estimated expense ratios calculated
utilizing Fund net assets at December 31, 1999 (rather than average daily net
assets for a full year, as used in the table above), the number of shareholder
accounts at that date, and other relevant factors. This calculation resulted in
an estimated total annual expense ratio of 0.73% for the Acquiring
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<PAGE>
Fund and 0.87% (without reflecting any expense reimbursements) for the Acquired
Fund.
EXAMPLES (UNAUDITED)
Based on the costs above (including one year of capped expenses in each
period included in the Acquired Fund column), the following examples are
intended to help you compare the cost of investing in the Funds with the cost of
investing in other mutual funds. The examples assume that you invest $10,000 in
each Fund for the time periods indicated and then redeem all of your shares at
the end of those periods. The examples also assume that your investment has a 5%
return each year, you reinvested all dividends and distributions, and each
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be as follows:
<TABLE>
<CAPTION>
ACQUIRING ACQUIRED PRO FORMA
YEAR FUND FUND (COMBINED)**
- ---- --------- -------- ------------
<S> <C> <C> <C>
1ST................................... $ 73 $ 77 $ 75
3RD................................... $227 $ 272 $233
5TH................................... $395 $ 484 $406
10TH.................................. $883 $1,094 $906
</TABLE>
- ------------------------
** Pro Forma expenses reflect the implementation of the Administrative Fee for
the Acquiring Fund to be effective upon the Reorganization.
FINANCIAL HIGHLIGHTS
The financial highlights table for the Acquiring Fund, which is intended to
help you understand the Acquiring Fund's financial performance for the past five
years, is included in the Acquiring Fund's prospectus dated October 1, 1999,
which is included herewith and incorporated herein by reference.
DISTRIBUTION OF SHARES
Scudder Investor Services, Inc. ("SIS"), Two International Place, Boston,
Massachusetts 02110, a subsidiary of the Investment Manager, is the principal
underwriter of each Fund. SIS charges no direct fees in connection with the
distribution of shares of the Funds. Following the Reorganization, Acquiring
Fund shareholders will continue to be able to purchase shares of the funds in
the Scudder Family of Funds on a no-load basis.
24
<PAGE>
PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
The purchase, redemption and exchange procedures and privileges of the
Acquired Fund are identical to those of the S Class Shares.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each of the Funds intends to declare dividends from its net investment
income daily and to distribute them monthly. Each of the Funds intends to
distribute net realized capital gains after utilization of capital loss
carryforwards, if any, in November or December of each year. An additional
distribution may be made if necessary. Dividends and distributions of each Fund
will be invested in additional shares of the Fund at net asset value and
credited to the shareholder's account on the payment date or, at the
shareholder's election, paid in cash.
If the Plan is approved by the Acquired Fund's shareholders, the Acquired
Fund will pay its shareholders a distribution of all undistributed net
investment income and undistributed realized net capital gains immediately prior
to the Closing.
TAX CONSEQUENCES
As a condition to the Reorganization, the Acquiring Fund and the Acquired
Fund will have received an opinion of Willkie Farr & Gallagher in connection
with the Reorganization, to the effect that, based upon certain facts,
assumptions and representations, the Reorganization will constitute a tax-free
reorganization within the meaning of section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Code"). If the Reorganization constitutes a
tax-free reorganization, no gain or loss will be recognized by the Acquired Fund
or its shareholders as a direct result of the Reorganization. See "The Proposed
Transaction -- Federal Income Tax Consequences."
II. PRINCIPAL RISK FACTORS
Because of their similar investment objectives, policies and strategies, the
principal risks presented by the Acquiring Fund are similar to those presented
by the Acquired Fund. The main risks applicable to each Fund include, among
others, management risk (i.e., securities selection by the Investment Manager),
risk associated with interest rates, and risk associated with credit quality.
Interest rate risk is generally greater for funds investing in fixed income
securities with longer maturities and portfolios with longer durations (duration
is a measure of sensitivity to interest rate movements). Because the Acquiring
Fund generally invests in securities with longer maturities and generally has a
25
<PAGE>
portfolio with a longer duration than does the Acquired Fund (see "Investment
Objectives, Policies and Restrictions of the Funds"), interest rate risk will
generally be greater for the Acquiring Fund than for the Acquired Fund.
For a further discussion of the investment techniques and risk factors
applicable to the Acquired Fund and the Acquiring Fund, see the "Investment
Objectives, Policies and Restrictions of the Funds" below, and the prospectuses
and statements of additional information for the Funds, which are incorporated
by reference herein.
III. THE PROPOSED TRANSACTION
DESCRIPTION OF THE PLAN
As stated above, the Plan provides for the transfer of all or substantially
all of the assets of the Acquired Fund to the Acquiring Fund in exchange for
that number of full and fractional S Class Shares having an aggregate net asset
value equal to the aggregate net asset value of the Acquired Fund as of the
close of business on the Valuation Date. The Acquiring Fund will assume all of
the liabilities of the Acquired Fund. The Acquired Fund will distribute the
S Class Shares received in the exchange to the shareholders of the Acquired Fund
in complete liquidation of the Acquired Fund. The Acquired Fund will be
abolished as a series of the Trust.
Upon completion of the Reorganization, each shareholder of the Acquired Fund
will own that number of full and fractional S Class Shares having an aggregate
net asset value equal to the aggregate net asset value of such shareholder's
shares held in the Acquired Fund immediately as of the close of business on the
Valuation Date. Such shares will be held in an account with the Trust identical
in all material respects to the account currently maintained by the Trust for
such shareholder. In the interest of economy and convenience, S Class Shares
issued to the Acquired Fund's shareholders will be in uncertificated form.
Until the Closing, shareholders of the Acquired Fund will continue to be
able to redeem their shares at the net asset value next determined after receipt
by the Acquired Fund's transfer agent of a redemption request in proper form.
Redemption requests (including by check) and purchase requests received by the
transfer agent after the Closing will be treated as requests received for the
redemption or purchase of S Class Shares received by the shareholder in
connection with the Reorganization.
The obligations of the Trust on behalf of each of the Acquired Fund and the
Acquiring Fund under the Plan are subject to various conditions, as stated
therein. Among other things, the Plan requires that all filings be made with,
and
26
<PAGE>
all authority be received from, the SEC and state securities commissions as may
be necessary in the opinion of counsel to permit the parties to carry out the
transactions contemplated by the Plan. The Acquired Fund and the Acquiring Fund
are in the process of making the necessary filings. To provide against
unforeseen events, the Plan may be terminated or amended at any time prior to
the Closing by action of the Trustees of the Trust, notwithstanding the approval
of the Plan by the shareholders of the Acquired Fund. However, no amendment may
be made that materially adversely affects the interests of the shareholders of
the Acquired Fund without obtaining the approval of the Acquired Fund's
shareholders. The Acquired Fund and the Acquiring Fund may at any time waive
compliance with certain of the covenants and conditions contained in the Plan.
For a complete description of the terms and conditions of the Reorganization,
see the Plan at Exhibit A.
Each Fund will pay its own allocable share of expenses associated with the
Reorganization, except that Scudder Kemper will bear any such expenses in excess
of $21,642 for the Acquiring Fund and $11,056 for the Acquired Fund
(approximately $0.0004 and $0.0016 per share, respectively, based on December
31, 1999 net assets for each Fund). As investors in a Fund, Fund shareholders
indirectly bear a portion of these expenses.
BOARD APPROVAL OF THE PROPOSED TRANSACTION
Scudder Kemper first proposed the Reorganization to the Independent Trustees
of the Acquired Fund at a meeting held on October 5, 1999. The Reorganization
was presented to the Trustees and considered by them as part of a broader
initiative by Scudder Kemper to restructure many of the mutual funds advised by
it that are currently offered to retail investors (see "Synopsis -- Background
of the Reorganization" above). This initiative includes four major components:
(i) The combination of funds with similar investment objectives and
policies, including in particular the combination of the AARP Funds with
similar Scudder Funds currently offered to the general public;
(ii) The liquidation of certain small funds which have not achieved
market acceptance and which are unlikely to reach an efficient operating
size;
(iii) The implementation of an administration agreement for each fund,
covering, for a single fee rate, substantially all services required for the
operation of the fund (other than those provided under the fund's investment
management agreement) and most expenses; and
27
<PAGE>
(iv) The consolidation of the separate boards currently responsible for
overseeing several groups of no-load funds managed by Scudder Kemper into a
single board.
The Independent Trustees of the Acquired Fund reviewed the potential
implications of these proposals for the Acquired Fund as well as the various
other funds for which they serve as trustees or directors. They were assisted in
this review by their independent legal counsel and by independent consultants
with special expertise in financial and mutual fund industry matters. Following
the October 5 meeting, the Independent Trustees met in person or by telephone on
seven occasions (including committee meetings) to review and discuss these
proposals, both among themselves and with representatives of Scudder Kemper. On
a number of occasions, these meetings included representatives of the
independent trustees or directors of other funds affected by these proposals. In
the course of their review, the Independent Trustees requested and received
substantial additional information and suggested numerous changes to Scudder
Kemper's proposals, many of which were accepted.
Following the conclusion of this process, the Independent Trustees of the
Acquired Fund, the independent trustees/directors of other funds involved and
Scudder Kemper reached general agreement on the elements of a restructuring plan
as it affects shareholders of various funds and, where required, agreed to
submit elements of the plan for approval to shareholders of those funds.
On February 7, 2000, the Board of the Acquired Fund, including the
Independent Trustees of the Acquired Fund, approved the terms of the
Reorganization and certain related proposals. The Independent Trustees have also
unanimously agreed to recommend that the Reorganization be approved by the
Acquired Fund's shareholders.
In determining to recommend that the shareholders of the Acquired Fund
approve the Reorganization, the Board considered, among other factors: (a) the
fees and expense ratios of the Funds, including comparisons between the expenses
of the Acquired Fund and the estimated operating expenses of the Acquiring Fund,
and between the estimated operating expenses of the Acquiring Fund and other
mutual funds with similar investment objectives; (b) the terms and conditions of
the Reorganization and whether the Reorganization would result in the dilution
of shareholder interests; (c) the compatibility of the Acquired Fund's and the
Acquiring Fund's investment objectives, policies, restrictions and portfolios;
(d) the agreement by Scudder Kemper to provide services to the Acquiring Fund
for a fixed fee rate under the Administration Agreement with an initial three
year term; (e) the service features available to shareholders of the Acquired
Fund and the Acquiring Fund; (f) the costs to be borne by the Acquired Fund, the
Acquiring Fund and Scudder Kemper as a
28
<PAGE>
result of the Reorganization; (g) prospects for the Acquiring Fund to attract
additional assets; (h) the tax consequences of the Reorganization on the
Acquired Fund, the Acquiring Fund and their respective shareholders; and
(i) the investment performance of the Acquired Fund and the Acquiring Fund.
The Trustees also gave extensive consideration to possible economies of
scale that might be realized by Scudder Kemper in connection with the
Reorganization, as well as the other fund combinations included in Scudder
Kemper's restructuring proposal. The Trustees concluded that these economies
were appropriately reflected in the fee and expense arrangements of the
Acquiring Fund, as proposed to be revised upon completion of the Reorganization.
In particular, the Trustees considered the benefits to shareholders resulting
from locking in the rate of the Acquiring Fund's Administrative Fee for an
initial three-year period. Because the Acquiring Fund will pay only its stated
Administrative Fee rate for such services and expenses regardless of changes in
actual costs, the Acquiring Fund's shareholders will be protected from increases
in the Acquiring Fund's expense ratio attributable to increases in such actual
costs. The Board also considered the protection this would afford shareholders
if the Acquiring Fund's net assets declined as a result of market fluctuations
or net redemptions.
The Trustees also considered the impact of the Reorganization on the total
expenses to be borne by shareholders of the Acquired Fund. As noted above under
"Comparison of Expenses," the pro forma expense ratio (reflecting the
Administrative Fee) for the combined Fund following the Reorganization is lower
than the current expense ratio for the Acquired Fund. The Board also considered
that the Reorganization would permit the shareholders of the Acquired Fund to
pursue similar investment goals in a larger fund. In this regard, Scudder Kemper
advised the Trustees of the Acquired Fund that the Acquired Fund's shareholders
will benefit from being in a larger fund which will likely have the ability to
effect portfolio transactions on more favorable terms and provide Scudder Kemper
with greater investment flexibility and the ability to select a larger number of
portfolio securities for the combined Fund, with the ability to spread
investment risks among a larger number of portfolio securities.
The Trustees also requested and considered information provided by Scudder
Kemper relating to the risk-return tradeoffs of investing in a fund with a
longer average duration (such as the Acquiring Fund) relative to investing in a
fund with a shorter average duration (such as the Acquired Fund).
Finally, the Trustees concluded that the shareholders of the Acquired Fund
would be better served by having their interests represented by a single board
of trustees with responsibility for overseeing substantially all of the funds to
be
29
<PAGE>
marketed as a "family of funds" through Scudder's no-load distribution channels.
Accordingly, the Trustees unanimously agreed to recommend the election of a new
consolidated board comprised of representatives of each of the various boards
currently serving as trustees or directors of these funds.
Based on all of the foregoing, the Board concluded that the Acquired Fund's
participation in the Reorganization would be in the best interests of the
Acquired Fund and would not dilute the interests of the Acquired Fund's
shareholders. THE BOARD OF TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES,
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF THE ACQUIRED FUND APPROVE THE
REORGANIZATION.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
The Acquiring Fund is a series of the Trust, a Massachusetts business trust
established under a Declaration of Trust dated December 28, 1982, as amended.
The Trust's authorized capital consists of an unlimited number of shares of
beneficial interest, par value $0.01 per share. The Trustees of the Trust are
authorized to divide the Acquiring Trust's shares into separate series. The
Acquiring Fund is one of two series of the Trust that the Board has created to
date. The Trustees of the Trust are also authorized to further divide the shares
of the series of the Trust into classes. The Trustees of the Trust have
authorized the division of the Acquiring Fund into two classes, S Class and AARP
Class. It is anticipated that this division will occur prior to the Closing and
that shares of the Acquiring Fund existing at that time will be redesignated as
S Class shares of the Acquiring Fund. If the division does not occur prior to
the Closing, then the Reorganization will not be consummated. Although
shareholders of different classes of a series have an interest in the same
portfolio of assets, shareholders of different classes may bear different
expenses in connection with different methods of distribution and certain other
matters.
Each share of each class of the Acquiring Fund represents an interest in the
Acquiring Fund that is equal to and proportionate with each other share of that
class of the Acquiring Fund. Acquiring Fund shareholders are entitled to one
vote per share held on matters on which they are entitled to vote. In the areas
of shareholder voting and the powers and conduct of the Trustees, there are no
material differences between the rights of shareholders of the Acquired Fund and
the rights of shareholders of the Acquiring Fund.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is conditioned upon the receipt by the Trust, on behalf
of each Fund, of an opinion from Willkie Farr & Gallagher, substantially to the
30
<PAGE>
effect that, based upon certain facts, assumptions and representations of the
parties, for federal income tax purposes: (i) the transfer to the Acquiring Fund
of all or substantially all of the assets of the Acquired Fund in exchange
solely for S Class Shares and the assumption by the Acquiring Fund of all of the
liabilities of the Acquired Fund, followed by the distribution of such shares to
the Acquired Fund's shareholders in exchange for their shares of the Acquired
Fund in complete liquidation of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the Code, and the
Acquiring Fund and the Acquired Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be
recognized by the Acquired Fund upon the transfer of all or substantially all of
its assets to the Acquiring Fund in exchange solely for S Class Shares and the
assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund
or upon the distribution of the S Class Shares to the Acquired Fund shareholders
in exchange for their shares of the Acquired Fund; (iii) the basis of the assets
of the Acquired Fund in the hands of the Acquiring Fund will be the same as the
basis of such assets of the Acquired Fund immediately prior to the transfer;
(iv) the holding period of the assets of the Acquired Fund in the hands of the
Acquiring Fund will include the period during which such assets were held by the
Acquired Fund; (v) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Acquired Fund in exchange for S Class Shares
and the assumption by the Acquiring Fund of all of the liabilities of the
Acquired Fund; (vi) no gain or loss will be recognized by the shareholders of
the Acquired Fund upon the receipt of the S Class Shares solely in exchange for
their shares of the Acquired Fund as part of the transaction; (vii) the basis of
the S Class Shares received by the shareholders of the Acquired Fund will be the
same as the basis of the shares of the Acquired Fund exchanged therefor; and
(viii) the holding period of S Class Shares received by the shareholders of the
Acquired Fund will include the holding period during which the shares of the
Acquired Fund exchanged therefor were held, provided that at the time of the
exchange the shares of the Acquired Fund were held as capital assets in the
hands of the shareholders of the Acquired Fund.
After the Closing, the Acquiring Fund may dispose of certain securities
received by it from the Acquired Fund in connection with the Reorganization,
which may result in transaction costs and capital gains.
While the Trust is not aware of any adverse state or local tax consequences
of the proposed Reorganization, it has not requested any ruling or opinion with
respect to such consequences and shareholders may wish to consult their own tax
adviser with respect to such matters.
31
<PAGE>
CAPITALIZATION
The following table shows on an unaudited basis the capitalization of each
Fund as of October 31, 1999, and on a pro forma basis as of that date, giving
effect to the Reorganization:
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
ACQUIRING FUND FUND ADJUSTMENTS COMBINED(1)
-------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Net Assets........... $587,014,460 $87,982,120 ($32,698)(2) $674,963,882(3)
Net Asset Value Per
Share.............. $ 10.88 $ 11.85 -- $ 10.88
Shares Outstanding... 53,956,645 7,421,852 663,724 62,042,221
</TABLE>
- ------------------------------
(1) Assumes the Reorganization had been consummated on October 31, 1999, and is
for information purposes only. No assurance can be given as to how many
shares of the Acquiring Fund will be received by the shareholders of the
Acquired Fund on the date the Reorganization takes place, and the foregoing
should not be relied upon to reflect the number of shares of the Acquiring
Fund that actually will be received on or after such date.
(2) Represents one-time proxy, legal, accounting and other costs of the
Reorganization of $21,642 and $11,056 to be borne by the Acquiring Fund and
the Acquired Fund, respectively.
(3) Pro forma combined net assets do not reflect expense reductions that would
result from the implementation of the Administrative Fee for the Acquiring
Fund.
THE BOARD OF TRUSTEES OF SCUDDER TAX FREE TRUST UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF SCUDDER LIMITED TERM TAX FREE FUND VOTE IN FAVOR OF THIS
PROPOSAL 2.
PROPOSAL 3: RATIFICATION OR REJECTION OF THE SELECTION OF INDEPENDENT
ACCOUNTANTS
The Board of the Trust, including a majority of the Independent Trustees,
has selected PricewaterhouseCoopers LLP to act as independent accountants of the
Acquired Fund for the Acquired Fund's current fiscal year. One or more
representatives of PricewaterhouseCoopers LLP are expected to be present at the
Meeting and will have an opportunity to make a statement if they so desire. Such
representatives are expected to be available to respond to appropriate questions
posed by shareholders or management.
THE BOARD OF TRUSTEES OF SCUDDER TAX FREE TRUST UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF SCUDDER LIMITED TERM TAX FREE FUND VOTE IN FAVOR OF THIS
PROPOSAL 3.
32
<PAGE>
ADDITIONAL INFORMATION
INFORMATION ABOUT THE FUNDS
Additional information about the Trust, the Funds and the Reorganization has
been filed with the SEC and may be obtained without charge by writing to Scudder
Investor Services, Inc., Two International Place, Boston, MA 02110-4103, or by
calling 1-800-225-2470.
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith,
files reports, proxy material and other information about each of the Funds with
the SEC. Such reports, proxy material and other information filed by the Trust
can be inspected and copied at the Public Reference Room maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following SEC
Regional Offices: Northeast Regional Office, 7 World Trade Center, Suite 1300,
New York, NY 10048; Southeast Regional Office, 1401 Brickell Avenue, Suite 200,
Miami, FL 33131; Midwest Regional Office, Citicorp Center, 500 W. Madison
Street, Chicago, IL, 60661-2511; Central Regional Office, 1801 California
Street, Suite 4800, Denver, CO 80202-2648; and Pacific Regional Office, 5670
Wilshire Boulevard, 11(th) Floor, Los Angeles, CA 90036-3648. Copies of such
material can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC
maintains an Internet World Wide Web site (at http://www.sec.gov) which contains
the statements of additional information for the Trust, materials that are
incorporated by reference into the prospectuses and statements of additional
information, and other information about the Trust and the Funds.
INTERESTS OF CERTAIN PERSONS
The Investment Manager has a financial interest in the Reorganization,
arising from the fact that its fee under its investment management agreement
with the Acquiring Fund will increase as the amount of the Acquiring Fund's
assets increases. The amount of those assets will increase by virtue of the
Reorganization. See "Synopsis -- Investment Manager; Fees and Expenses" above.
GENERAL
PROXY SOLICITATION. Proxy solicitation costs will be considered
Reorganization expenses and will be allocated accordingly. In addition to
solicitation by mail, certain officers and representatives of the Trust,
officers and employees of
33
<PAGE>
Scudder Kemper and certain financial services firms and their representatives,
who will receive no extra compensation for their services, may solicit proxies
by telephone, telegram or personally.
Any Acquired Fund shareholder giving a proxy has the power to revoke it by
mail (addressed to the Secretary at the principal executive office of the
Acquired Fund, c/o Scudder Kemper Investments, Inc., at the address for the
Acquired Fund shown at the beginning of this Proxy Statement/Prospectus) or in
person at the Meeting, by executing a superseding proxy or by submitting a
notice of revocation to the Acquired Fund. All properly executed proxies
received in time for the Meeting will be voted as specified in the proxy or, if
no specification is made, in favor of each Proposal.
The presence at any shareholders' meeting, in person or by proxy, of the
holders of one-third of the shares of the Trust (for a trust-wide vote) or the
Acquired Fund (for a fund-wide vote) entitled to be cast shall be necessary and
sufficient to constitute a quorum for the transaction of business. In the event
that the necessary quorum to transact business or the vote required to approve
any Proposal is not obtained at the Meeting, the persons named as proxies may
propose one or more adjournments of the Meeting in accordance with applicable
law to permit further solicitation of proxies with respect to that Proposal. Any
such adjournment as to a matter will require the affirmative vote of the holders
of a majority of the Trust's (for a trust-wide vote) or the Acquired Fund's (for
a fund-wide vote) shares present in person or by proxy at the Meeting. The
persons named as proxies will vote in favor of any such adjournment those
proxies which they are entitled to vote in favor of that Proposal and will vote
against any such adjournment those proxies to be voted against that Proposal.
For purposes of determining the presence of a quorum for transacting business at
the Meeting, abstentions and broker "non-votes" will be treated as shares that
are present but which have not been voted. Broker non-votes are proxies received
by the Acquired Fund from brokers or nominees when the broker or nominee has
neither received instructions from the beneficial owner or other persons
entitled to vote nor has discretionary power to vote on a particular matter.
Accordingly, shareholders are urged to forward their voting instructions
promptly.
Approval of Proposal 1 requires the affirmative vote of a plurality of the
shares of the Trust voting at the Meeting. Approval of Proposal 2 requires the
affirmative vote of the holders of a majority of the Acquired Fund's shares
outstanding and entitled to vote thereon. Approval of Proposal 3 requires the
affirmative vote of a majority of the shares of the Acquired Fund voting at the
Meeting. Abstentions and broker non-votes will not be counted in favor of, but
34
<PAGE>
will have no other effect on, Proposal 1 and will have the effect of a "no" vote
on Proposals 2 and 3.
Holders of record of the shares of the Acquired Fund at the close of
business on April 17, 2000 will be entitled to one vote per share on all
business of the Meeting. As of March 20, 2000, there were 6,338,695 shares of
the Acquired Fund outstanding.
As of January 31, 2000, the officers and Trustees of the Trust as a group
owned beneficially less than 1% of the outstanding shares of the Acquiring Fund.
Appendix 2 hereto sets forth the beneficial owners of at least 5% of each Fund's
shares. To the best of the Trust's knowledge, as of January 31, 2000, no person
owned beneficially at least 5% of either Fund's outstanding shares, except as
stated in Appendix 2.
Shareholder Communications Corporation ("SCC") has been engaged to assist in
the solicitation of proxies, at an estimated cost of $859. As the Meeting date
approaches, certain shareholders of the Acquired Fund may receive a telephone
call from a representative of SCC if their votes have not yet been received.
Authorization to permit SCC to execute proxies may be obtained by telephonic or
electronically transmitted instructions from shareholders of the Acquired Fund.
Proxies that are obtained telephonically will be recorded in accordance with the
procedures set forth below. The Trustees believe that these procedures are
reasonably designed to ensure that both the identity of the shareholder casting
the vote and the voting instructions of the shareholder are accurately
determined.
In all cases where a telephonic proxy is solicited, the SCC representative
is required to ask for each shareholder's full name, address, social security or
employer identification number, title (if the shareholder is authorized to act
on behalf of an entity, such as a corporation), and the number of shares owned,
and to confirm that the shareholder has received the proxy materials in the
mail. If the information solicited agrees with the information provided to SCC,
then the SCC representative has the responsibility to explain the process, read
the Proposals on the proxy card(s), and ask for the shareholder's instructions
on the Proposals. Although the SCC representative is permitted to answer
questions about the process, he or she is not permitted to recommend to the
shareholder how to vote, other than to read any recommendation set forth in the
proxy statement. SCC will record the shareholder's instructions on the card.
Within 72 hours, the shareholder will be sent a letter or mailgram to confirm
his or her vote and asking the shareholder to call SCC immediately if his or her
instructions are not correctly reflected in the confirmation.
35
<PAGE>
If a shareholder wishes to participate in the Meeting, but does not wish to
give a proxy by telephone or electronically, the shareholder may still submit
the proxy card(s) originally sent with the proxy statement or attend in person.
Should shareholders require additional information regarding the proxy or
replacement proxy card(s), they may contact SCC toll-free at 1-800-603-1915. Any
proxy given by a shareholder is revocable until voted at the Meeting.
Shareholders may also provide their voting instructions through telephone
touch-tone voting or Internet voting. These options require shareholders to
input a control number which is located on each voting instruction card. After
inputting this number, shareholders will be prompted to provide their voting
instructions on the Proposals. Shareholders will have an opportunity to review
their voting instructions and make any necessary changes before submitting their
voting instructions and terminating their telephone call or Internet link.
Shareholders who vote on the Internet, in addition to confirming their voting
instructions prior to submission, will also receive an e-mail confirming their
instructions.
SHAREHOLDER PROPOSALS FOR SUBSEQUENT MEETINGS. Shareholders wishing to
submit proposals for inclusion in a proxy statement for a shareholder meeting
subsequent to the Meeting, if any, should send their written proposals to the
Secretary of the Trust, c/o Scudder Kemper Investments, Inc., Two International
Place, Boston, Massachusetts 02110, within a reasonable time before the
solicitation of proxies for such meeting. The timely submission of a proposal
does not guarantee its inclusion.
OTHER MATTERS TO COME BEFORE THE MEETING. No Trustee is aware of any
matters that will be presented for action at the Meeting other than the matters
set forth herein. Should any other matters requiring a vote of shareholders
arise, the proxy in the accompanying form will confer upon the person or persons
entitled to vote the shares represented by such proxy the discretionary
authority to vote the shares as to any such other matters in accordance with
their best judgment in the interest of the Trust and/or the Acquired Fund.
36
<PAGE>
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) (OR TAKE
ADVANTAGE OF AVAILABLE ELECTRONIC OR TELEPHONIC VOTING PROCEDURES) PROMPTLY. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
By Order of the Board,
/s/ John Millette
John Millette
Secretary
37
<PAGE>
INDEX OF EXHIBITS AND APPENDICES
<TABLE>
<S> <C> <C>
EXHIBIT A: Agreement and Plan of Reorganization
EXHIBIT B: Management's Discussion of Acquiring Fund's
Performance
APPENDIX 1: Trustee and Nominee Shareholdings
APPENDIX 2: Beneficial Owners of Fund Shares
</TABLE>
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this day of , 2000, by and between Scudder Tax Free Trust (the
"Trust"), a Massachusetts business trust with its principal place of business at
Two International Place, on behalf of each of Scudder Medium Term Tax Free Fund
(the "Acquiring Fund") and Scudder Limited Term Tax Free Fund (the "Acquired
Fund" and, together with the Acquiring Fund, each a "Fund" and collectively the
"Funds") . Each of the Acquiring Fund and the Acquired Fund is a separate series
of the Trust.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization (the "Reorganization")
will consist of the transfer of all or substantially all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for voting shares of
beneficial interest of the S Class of shares ($.01 par value per share) of the
Acquiring Fund (the "Acquiring Fund Shares"), the assumption by the Acquiring
Fund of all of the liabilities of the Acquired Fund and the distribution of the
Acquiring Fund Shares to the shareholders of the Acquired Fund in complete
liquidation of the Acquired Fund as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND LIABILITIES
AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Acquired Fund agrees
to transfer to the Acquiring Fund all or substantially all of the Acquired
Fund's assets as set forth in section 1.2, and the Acquiring Fund agrees in
exchange therefor (i) to deliver to the Acquired Fund that number of full and
fractional Acquiring Fund Shares determined by dividing the value of the
Acquired Fund's net assets, computed in the manner and as of the time and date
set forth in section 2.1, by the net asset value of one Acquiring Fund Share,
computed in the manner and as of the time and date set forth in section 2.2; and
(ii) to assume all of the liabilities of the Acquired Fund. Such transactions
shall take place at the closing provided for in section 3.1 (the "Closing").
A-1
<PAGE>
1.2. The assets of the Acquired Fund to be acquired by the Acquiring Fund
(the "Assets") shall consist of all assets, including, without limitation, all
cash, cash equivalents, securities, commodities and futures interests and
dividends or interest or other receivables that are owned by the Acquired Fund
and any deferred or prepaid expenses shown on the unaudited statement of assets
and liabilities of the Acquired Fund prepared as of the effective time of the
Closing in accordance with generally accepted accounting principles ("GAAP")
applied consistently with those of the Acquired Fund's most recent audited
balance sheet. The Assets shall constitute at least 90% of the fair market value
of the net assets, and at least 70% of the fair market value of the gross
assets, held by Acquired Fund immediately before the Closing (excluding for
these purposes assets used to pay the dividends and other distributions paid
pursuant to section 1.4).
1.3. The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date as defined in section 3.1.
1.4. On or as soon as practicable prior to the Closing Date as defined in
section 3.1, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
1.5. Immediately after the transfer of Assets provided for in section 1.1,
the Acquired Fund will distribute to the Acquired Fund's shareholders of record
(the "Acquired Fund Shareholders"), determined as of the Valuation Time (as
defined in section 2.1), on a pro rata basis, the Acquiring Fund Shares received
by the Acquired Fund pursuant to section 1.1 and will completely liquidate. Such
distribution and liquidation will be accomplished by the transfer of the
Acquiring Fund Shares then credited to the account of the Acquired Fund on the
books of the Acquiring Fund to open accounts on the share records of the
Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net
asset value of Acquiring Fund Shares to be so credited to Acquired Fund
Shareholders shall be equal to the aggregate net asset value of the Acquired
Fund shares owned by such shareholders as of the Valuation Time. All issued and
outstanding shares of the Acquired Fund will simultaneously be cancelled on the
books of the Acquired Fund, although share certificates representing interests
in shares of the Acquired Fund will represent a number of Acquiring Fund Shares
after the Closing Date as determined in accordance with section 2.3. The
Acquiring Fund will not issue certificates representing Acquiring Fund Shares in
connection with such exchange.
A-2
<PAGE>
1.6. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's then-current prospectus and statement of
additional information.
1.7. Any reporting responsibility of the Acquired Fund including, without
limitation, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
1.8. All books and records of the Acquired Fund, including all books and
records required to be maintained under the Investment Company Act of 1940, as
amended (the "1940 Act"), and the rules and regulations thereunder, shall be
available to the Acquiring Fund from and after the Closing Date and shall be
turned over to the Acquiring Fund as soon as practicable following the Closing
Date.
2. VALUATION
2.1. The value of the Assets shall be computed as of the close of regular
trading on The New York Stock Exchange, Inc. (the "NYSE") on the business day
immediately preceding the Closing Date, as defined in Section 3.1 (the
"Valuation Time") after the declaration and payment of any dividends and/or
other distributions on that date, using the valuation procedures set forth in
the Trust's Declaration of Trust, as amended, and then-current prospectus or
statement of additional information.
2.2. The net asset value of an Acquiring Fund share shall be the net asset
value per share computed as of the Valuation Time using the valuation procedures
referred to in section 2.1.
2.3. The number of the Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Assets shall be determined by
dividing the value of the Assets with respect to shares of the Acquired Fund
determined in accordance with section 2.1 by the net asset value of an Acquiring
Fund Share determined in accordance with section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act and
shall be subject to confirmation by each Fund's respective independent
accountants upon the reasonable request of the other Fund.
A-3
<PAGE>
3. CLOSING AND CLOSING DATE
3.1. The Closing of the transactions contemplated by this Agreement shall be
July 31, 2000, or such later date as the parties may agree in writing (the
"Closing Date"). All acts taking place at the Closing shall be deemed to take
place simultaneously as of 9:00 a.m., Eastern time, on the Closing Date, unless
otherwise agreed to by the parties. The Closing shall be held at the offices of
Dechert Price & Rhoads, Ten Post Office Square -- South, Boston, MA 02109, or at
such other place and time as the parties may agree.
3.2. The Acquired Fund shall deliver to Acquiring Fund on the Closing Date a
schedule of Assets.
3.3. State Street Bank and Trust Company ("State Street"), custodian for the
Acquired Fund, shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets shall have been delivered in proper form to
State Street, custodian for the Acquiring Fund, prior to or on the Closing Date
and (b) all necessary taxes in connection with the delivery of the Assets,
including all applicable federal and state stock transfer stamps, if any, have
been paid or provision for payment has been made. The Acquired Fund's portfolio
securities represented by a certificate or other written instrument shall be
presented by the custodian for the Acquired Fund to the custodian for the
Acquiring Fund for examination no later than five business days preceding the
Closing Date and transferred and delivered by the Acquired Fund as of the
Closing Date by the Acquired Fund for the account of Acquiring Fund duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof. The Acquired Fund's portfolio securities and instruments
deposited with a securities depository, as defined in Rule 17f-4 under the 1940
Act, shall be delivered as of the Closing Date by book entry in accordance with
the customary practices of such depositories and the custodian for the Acquiring
Fund. The cash to be transferred by the Acquired Fund shall be delivered by wire
transfer of federal funds on the Closing Date.
3.4. Scudder Service Corp. (the "Transfer Agent"), on behalf of the Acquired
Fund, shall deliver at the Closing a certificate of an authorized officer
stating that its records contain the names and addresses of the Acquired Fund
Shareholders and the number and percentage ownership (to three decimal places)
of outstanding Acquired Fund shares owned by each such shareholder immediately
prior to the Closing. The Acquiring Fund shall issue and deliver a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing Date to the
Acquired Fund or provide evidence satisfactory to the Acquired Fund that such
Acquiring Fund Shares have been credited to the Acquired Fund's account on the
books of the Acquiring Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, share
A-4
<PAGE>
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request to effect the transactions contemplated by this
Agreement.
3.5. In the event that immediately prior to the Valuation Time (a) the NYSE
or another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board members of
either party to this Agreement, accurate appraisal of the value of the net
assets with respect to the Acquiring Fund Shares or the Acquired Fund shares is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Trust, on behalf of the Acquired Fund, represents and warrants to
the Acquiring Fund as follows:
(a) The Trust is a business trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under the
Trust's Declaration of Trust, as amended, to own all of its properties and
assets and to carry on its business as it is now being conducted;
(b) The Trust is registered with the Commission as an open-end
management investment company under the 1940 Act, and such registration is
in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund
of the transactions contemplated herein, except such as have been obtained
under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the 1940
Act and such as may be required by state securities laws;
(d) Other than with respect to contracts entered into in connection with
the portfolio management of the Acquired Fund which shall terminate on or
prior to the Closing Date, the Trust is not, and the execution, delivery and
performance of this Agreement by the Trust will not result, in violation of
Massachusetts law or of the Trust's Declaration of Trust, as amended, or
By-Laws, or of any material agreement, indenture, instrument, contract,
lease or other undertaking known to counsel to which the Acquired Fund is a
party or by which it is bound, and the execution, delivery and performance
of this Agreement by the Acquired Fund will not result in the
A-5
<PAGE>
acceleration of any obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or decree to
which the Acquired Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquired Fund or any properties or assets
held by it. The Acquired Fund knows of no facts which might form the basis
for the institution of such proceedings which would materially and adversely
affect its business and is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body which
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, Operations, and Changes in
Net Assets, the Financial Highlights, and the Investment Portfolio of the
Acquired Fund at and for the fiscal year ended May 31, 1999, have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are in
accordance with GAAP consistently applied, and such statements (a copy of
each of which has been furnished to the Acquiring Fund) present fairly, in
all material respects, the financial position of the Acquired Fund as of
such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquired Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(g) Since May 31, 1999, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred except as otherwise disclosed
to and accepted in writing by the Acquiring Fund. For purposes of this
subsection (g), a decline in net asset value per share of the Acquired Fund
due to declines in market values of securities in the Acquired Fund's
portfolio, the discharge of Acquired Fund liabilities, or the redemption of
Acquired Fund shares by Acquired Fund Shareholders shall not constitute a
material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquired Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and are
or will be correct in all material respects, and all federal and other taxes
shown as due or required to be shown as due on said returns and reports
shall have been paid or provision shall have been made for the payment
A-6
<PAGE>
thereof, and, to the best of the Acquired Fund's knowledge, no such return
is currently under audit and no assessment has been asserted with respect to
such returns;
(i) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment company
and has elected to be treated as such, has been eligible to and has computed
its federal income tax under Section 852 of the Code, and will have
distributed all of its investment company taxable income and net capital
gain (as defined in the Code) that has accrued through the Closing Date;
(j) All issued and outstanding shares of the Acquired Fund (i) have been
offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the
1933 Act and state securities laws, (ii) are, and on the Closing Date will
be, duly and validly issued and outstanding, fully paid and non-assessable
(recognizing that, under Massachusetts law, Acquired Fund Shareholders,
under certain circumstances, could be held personally liable for obligations
of the Acquired Fund), and (iii) will be held at the time of the Closing by
the persons and in the amounts set forth in the records of the Transfer
Agent, as provided in section 3.4. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of the Acquired Fund shares, nor is there outstanding any
security convertible into any of the Acquired Fund shares;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the Acquired Fund's assets to be transferred to the Acquiring Fund
pursuant to section 1.2 and full right, power, and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens or
other encumbrances, except those liens or encumbrances as to which the
Acquiring Fund has received notice at or prior to the Closing, and upon
delivery and payment for such assets, the Acquiring Fund will acquire good
and marketable title thereto, subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the 1933
Act and the 1940 Act, except those restrictions as to which the Acquiring
Fund has received notice and necessary documentation at or prior to the
Closing;
(l) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of the Board members of the Trust, and, subject to the approval of
the Acquired Fund Shareholders, this Agreement constitutes a valid and
A-7
<PAGE>
binding obligation of the Trust, on behalf of the Acquired Fund, enforceable
in accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other laws
relating to or affecting creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the National Association of Securities
Dealers, Inc. (the "NASD")), which may be necessary in connection with the
transactions contemplated hereby, shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto;
(n) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading; and
(o) The proxy statement of the Acquired Fund to be included in the
Registration Statement referred to in section 5.7 (the "Proxy Statement"),
insofar as it relates to the Acquired Fund, will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not materially
misleading; provided, however, that the representations and warranties in
this section shall not apply to statements in or omissions from the Proxy
Statement and the Registration Statement made in reliance upon and in
conformity with information that was furnished or should have been furnished
by the Acquiring Fund for use therein.
4.2. The Trust, on behalf of the Acquiring Fund, represents and warrants to
the Acquired Fund as follows:
(a) The Trust is a business trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under the
Trust's Declaration of Trust, as amended, to own all of its properties and
assets and to carry on its business as it is now being conducted;
A-8
<PAGE>
(b) The Trust is registered with the Commission as an open-end
management investment company under the 1940 Act, and such registration is
in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required by state securities laws;
(d) The Trust is not, and the execution, delivery and performance of
this Agreement by the Trust will not result, in violation of Massachusetts
law or of the Trust's Declaration of Trust, as amended, or By-Laws, or of
any material agreement, indenture, instrument, contract, lease or other
undertaking known to counsel to which the Acquiring Fund is a party or by
which it is bound, and the execution, delivery and performance of this
Agreement by the Acquiring Fund will not result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment or decree to which the
Acquiring Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquiring Fund or any properties or assets
held by it. The Acquiring Fund knows of no facts which might form the basis
for the institution of such proceedings which would materially and adversely
affect its business and is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body which
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, Operations, and Changes in
Net Assets, the Financial Highlights, and the Investment Portfolio of the
Acquiring Fund at and for the fiscal year ended May 31, 1999, have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are in
accordance with GAAP consistently applied, and such statements (a copy of
each of which has been furnished to the Acquired Fund) present fairly, in
all material respects, the financial position of the Acquiring Fund as of
such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquiring Fund required to be reflected on a balance
sheet (including the notes thereto) in accordance with GAAP as of such date
not disclosed therein;
A-9
<PAGE>
(g) Since May 31, 1999, there has not been any material adverse change
in the Acquiring Fund's financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred except as otherwise disclosed
to and accepted in writing by the Acquired Fund. For purposes of this
subsection (g), a decline in net asset value per share of the Acquiring Fund
due to declines in market values of securities in the Acquiring Fund's
portfolio, the discharge of Acquiring Fund liabilities, or the redemption of
Acquiring Fund shares by Acquiring Fund shareholders shall not constitute a
material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquiring Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and are
or will be correct in all material respects, and all federal and other taxes
shown as due or required to be shown as due on said returns and reports
shall have been paid or provision shall have been made for the payment
thereof, and, to the best of the Acquiring Fund's knowledge, no such return
is currently under audit and no assessment has been asserted with respect to
such returns;
(i) For each taxable year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such, has been
eligible to and has computed its federal income tax under Section 852 of the
Code, and will do so for the taxable year including the Closing Date;
(j) All issued and outstanding shares of the Acquiring Fund (i) have
been offered and sold in every state and the District of Columbia in
compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws and (ii) are, and on
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable (recognizing that, under Massachusetts law,
Acquiring Fund Shareholders, under certain circumstances, could be held
personally liable for the obligations of the Acquiring Fund). The Acquiring
Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquiring Fund shares, nor is there
outstanding any security convertible into any of the Acquiring Fund shares;
(k) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund, for the account of the Acquired Fund Shareholders, pursuant to the
terms of this Agreement, will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly
A-10
<PAGE>
issued and outstanding Acquiring Fund Shares, and will be fully paid and
non-assessable (recognizing that, under Massachusetts law, Acquiring Fund
Shareholders, under certain circumstances, could be held personally liable
for the obligations of the Acquiring Fund);
(l) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens or other
encumbrances, except those liens or encumbrances as to which the Acquired
Fund has received notice at or prior to the Closing;
(m) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of the Board members of the Acquiring Fund and this Agreement will
constitute a valid and binding obligation of the Acquiring Fund enforceable
in accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other laws
relating to or affecting creditors' rights and to general equity principles;
(n) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the NASD), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
(o) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading;
(p) The Proxy Statement to be included in the Registration Statement,
only insofar as it relates to the Acquiring Fund, will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading; provided, however, that the representations and
warranties in this section shall not apply to statements in or omissions
from
A-11
<PAGE>
the Proxy Statement and the Registration Statement made in reliance upon and
in conformity with information that was furnished or should have been
furnished by the Acquired Fund for use therein; and
(q) The Acquiring Fund agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state securities laws as may be necessary in order to continue
its operations after the Closing Date.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1. The Acquiring Fund and the Acquired Fund each covenants to operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that (a) such ordinary course of business will include (i) the
declaration and payment of customary dividends and other distributions and (ii)
such changes as are contemplated by the Funds' normal operations; and (b) each
Fund shall retain exclusive control of the composition of its portfolio until
the Closing Date.
5.2. Upon reasonable notice, the Acquiring Fund's officers and agents shall
have reasonable access to the Acquired Fund's books and records necessary to
maintain current knowledge of the Acquired Fund and to ensure that the
representations and warranties made by the Acquired Fund are accurate.
5.3. The Acquired Fund covenants to call a meeting of the Acquired Fund
Shareholders entitled to vote thereon to consider and act upon this Agreement
and to take all other reasonable action necessary to obtain approval of the
transactions contemplated herein. Such meeting shall be scheduled for no later
than July 13, 2000.
5.4. The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Agreement.
5.5. The Acquired Fund covenants that it will assist the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Acquired Fund shares and will provide the
Acquiring Fund with a list of affiliates of the Acquired Fund.
5.6. Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all actions, and do or cause
to be done, all things reasonably necessary, proper, and/or advisable to
consummate and make effective the transactions contemplated by this Agreement.
A-12
<PAGE>
5.7. Each Fund covenants to prepare in compliance with the 1933 Act, the
1934 Act and the 1940 Act the Registration Statement on Form N-14 (the
"Registration Statement") in connection with the meeting of the Acquired Fund
Shareholders to consider approval of this Agreement and the transactions
contemplated herein. The Acquiring Fund will file the Registration Statement,
including the Proxy Statement, with the Commission. The Acquired Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the Proxy Statement referred to
in section 4.1(o), all to be included in the Registration Statement, in
compliance in all material respects with the 1933 Act, the 1934 Act and the 1940
Act.
5.8. The Acquired Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquiring Fund, execute and deliver or cause to
be executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action as the Acquiring Fund may
reasonably deem necessary or desirable in order to vest in and confirm the
Acquiring Fund's title to and possession of all the assets and otherwise to
carry out the intent and purpose of this Agreement.
5.9. The Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act and 1940 Act, and such
of the state securities laws as it deems appropriate in order to continue its
operations after the Closing Date and to consummate the transactions
contemplated herein; provided, however, that the Acquiring Fund may take such
actions it reasonably deems advisable after the Closing Date as circumstances
change.
5.10. The Acquiring Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquired Fund, execute and deliver or cause to
be executed and delivered all such assignments, assumption agreements, releases,
and other instruments, and will take or cause to be taken such further action,
as the Acquired Fund may reasonably deem necessary or desirable in order to
(i) vest and confirm to the Acquired Fund title to and possession of all
Acquiring Fund Shares to be transferred to the Acquired Fund pursuant to this
Agreement and (ii) assume the liabilities from the Acquired Fund.
5.11. As soon as reasonably practicable after the Closing, the Acquired Fund
shall make a liquidating distribution to its shareholders consisting of the
Acquiring Fund Shares received at the Closing.
5.12. The Acquiring Fund and the Acquired Fund shall each use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
effect the transactions contemplated by this Agreement as promptly as
practicable.
A-13
<PAGE>
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions provided
for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1. All representations and warranties of the Trust, on behalf of the
Acquiring Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than the Acquired Fund, its adviser or any of their affiliates) against the
Acquiring Fund or its investment adviser(s), Board members or officers arising
out of this Agreement and (ii) no facts known to the Acquiring Fund which the
Acquiring Fund reasonably believes might result in such litigation.
6.2. The Acquiring Fund shall have delivered to the Acquired Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquired Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Acquiring Fund made in this Agreement are true and correct on and as of the
Closing Date, except as they may be affected by the transactions contemplated by
this Agreement, and as to such other matters as the Acquired Fund shall
reasonably request.
6.3. The Acquired Fund shall have received on the Closing Date an opinion of
Dechert Price & Rhoads, in a form reasonably satisfactory to the Acquired Fund,
and dated as of the Closing Date, to the effect that:
(a) The Trust has been duly formed and is an existing business trust;
(b) the Trust has the power to carry on its business as presently conducted
in accordance with the description thereof in the Acquiring Fund's
registration statement under the 1940 Act; (c) the Agreement has been duly
authorized, executed and delivered by the Trust, on behalf of the Acquiring
Fund, and constitutes a valid and legally binding obligation of the Trust,
on behalf of the Acquiring Fund, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and laws of general applicability relating to or affecting
creditors' rights and to general equity principles; (d) the execution and
delivery of the Agreement did not, and the exchange of the Acquired Fund's
assets for Acquiring Fund Shares pursuant to the Agreement will not, violate
the
A-14
<PAGE>
Trust's Declaration of Trust, as amended, or By-laws; and (e) to the
knowledge of such counsel, all regulatory consents, authorizations,
approvals or filings required to be obtained or made by the Acquiring Fund
under the Federal laws of the United States or the laws of the Commonwealth
of Massachusetts for the exchange of the Acquired Fund's assets for
Acquiring Fund Shares, pursuant to the Agreement have been obtained or made.
6.4. The Acquiring Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquiring Fund on or before the Closing Date.
6.5. The Acquiring Fund shall have entered into an administrative services
agreement with Scudder Kemper Investments, Inc. ("Scudder Kemper") in a form
reasonably satisfactory to the Acquired Fund.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquired Fund of all of the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following further
conditions:
7.1. All representations and warranties of the Trust, on behalf of the
Acquired Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than the Acquiring Fund, its adviser or any of their affiliates) against the
Acquired Fund or its investment adviser(s), Board members or officers arising
out of this Agreement and (ii) no facts known to the Acquired Fund which the
Acquired Fund reasonably believes might result in such litigation.
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities as of the Closing Date,
certified by the Treasurer of the Acquired Fund.
7.3. The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Trust with respect to the Acquired Fund made in this Agreement are true and
correct on and as of the Closing Date, except as they may be affected by the
A-15
<PAGE>
transactions contemplated by this Agreement, and as to such other matters as the
Acquiring Fund shall reasonably request.
7.4. The Acquiring Fund shall have received on the Closing Date an opinion
of Dechert Price & Rhoads, in a form reasonably satisfactory to the Acquiring
Fund, and dated as of the Closing Date, to the effect that:
(a) The Trust has been duly formed and is an existing business trust;
(b) the Trust has the power to carry on its business as presently conducted
in accordance with the description thereof in the Trust's registration
statement under the 1940 Act; (c) the Agreement has been duly authorized,
executed and delivered by the Trust, on behalf of the Acquired Fund, and
constitutes a valid and legally binding obligation of the Trust, on behalf
of the Acquired Fund, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
laws of general applicability relating to or affecting creditors' rights and
to general equity principles; (d) the execution and delivery of the
Agreement did not, and the exchange of the Acquired Fund's assets for
Acquiring Fund Shares pursuant to the Agreement will not, violate the
Trust's Declaration of Trust, as amended, or By-laws; and (e) to the
knowledge of such counsel, all regulatory consents, authorizations,
approvals or filings required to be obtained or made by the Acquired Fund
under the Federal laws of the United States or the laws of the Commonwealth
of Massachusetts for the exchange of the Acquired Fund's assets for
Acquiring Fund Shares, pursuant to the Agreement have been obtained or made.
7.5. The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquired Fund on or before the Closing Date.
7.6. The Acquiring Fund shall have entered into an administrative services
agreement with Scudder Kemper.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not been met on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of the Trust's Declaration of
Trust, as amended, and By-Laws, applicable Massachusetts law and the
A-16
<PAGE>
1940 Act, and certified copies of the resolutions evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything herein to
the contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
conditions set forth in this section 8.1.
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending or to its knowledge threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain material damages or
other relief in connection with, this Agreement or the transactions contemplated
herein.
8.3. All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions.
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
8.5. The parties shall have received an opinion of Willkie Farr & Gallagher
addressed to the Trust, on behalf of each Fund, in a form reasonably
satisfactory to each such party to this Agreement, substantially to the effect
that, based upon certain facts, assumptions and representations of the parties,
for federal income tax purposes: (i) the transfer to the Acquiring Fund of all
or substantially all of the assets of the Acquired Fund in exchange solely for
Acquiring Fund Shares and the assumption by the Acquiring Fund of all of the
liabilities of the Acquired Fund, followed by the distribution of such shares to
the Acquired Fund Shareholders in exchange for their shares of the Acquired Fund
in complete liquidation of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a)(1) of the Code, and the Acquiring Fund and
the Acquired Fund will each be "a party to a reorganization" within the meaning
of Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Acquired Fund upon the transfer of all or substantially all of its assets to the
Acquiring Fund in exchange solely for Acquiring Fund Shares and the assumption
by the Acquiring Fund of all of the liabilities of the Acquired Fund; (iii) the
basis of the assets of the Acquired Fund in the hands of the Acquiring Fund will
be the same as the basis of such assets of the Acquired Fund immediately prior
A-17
<PAGE>
to the transfer; (iv) the holding period of the assets of the Acquired Fund in
the hands of the Acquiring Fund will include the period during which such assets
were held by the Acquired Fund; (v) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the Acquired Fund in exchange
for Acquiring Fund Shares and the assumption by the Acquiring Fund of all of the
liabilities of the Acquired Fund; (vi) no gain or loss will be recognized by
Acquired Fund Shareholders upon the receipt of the Acquiring Fund Shares solely
in exchange for their shares of the Acquired Fund as part of the transaction;
(vii) the basis of the Acquiring Fund Shares received by Acquired Fund
Shareholders will be the same as the basis of the shares of the Acquired Fund
exchanged therefor; and (viii) the holding period of Acquiring Fund Shares
received by Acquired Fund Shareholders will include the holding period during
which the shares of the Acquired Fund exchanged therefor were held, provided
that at the time of the exchange the shares of the Acquired Fund were held as
capital assets in the hands of Acquired Fund Shareholders. The delivery of such
opinion is conditioned upon receipt by Willkie Farr & Gallagher of
representations it shall request of the Trust. Notwithstanding anything herein
to the contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
condition set forth in this section 8.5.
9. INDEMNIFICATION
9.1. The Acquiring Fund agrees to indemnify and hold harmless the Acquired
Fund and each of the Acquired Fund's Board members and officers from and against
any and all losses, claims, damages, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Acquired Fund or any of its
Board members or officers may become subject, insofar as any such loss, claim,
damage, liability or expense (or actions with respect thereto) arises out of or
is based on any breach by the Acquiring Fund of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
9.2. The Acquired Fund agrees to indemnify and hold harmless the Acquiring
Fund and each of the Acquiring Fund's Board members and officers from and
against any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Acquiring Fund or any of its
Board members or officers may become subject, insofar as any such loss, claim,
damage, liability or expense (or actions with respect thereto) arises out of or
is based on any breach by the Acquired Fund of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
A-18
<PAGE>
10. FEES AND EXPENSES
10.1. Each of the Acquiring Fund on behalf of the Acquiring Fund, and the
Trust, on behalf of the Acquired Fund, represents and warrants to the other that
it has no obligations to pay any brokers or finders fees in connection with the
transactions provided for herein.
10.2. Each Fund will pay its own allocable share of expenses associated with
the Reorganization, except that Scudder Kemper will bear any such expenses in
excess of $21,642 for the Acquiring Fund and $11,056 for the Acquired Fund
(approximately $0.0004 and $0.0016 per share, respectively, based on
December 31, 1999 net assets for each Fund). Any such expenses which are so
borne by Scudder Kemper will be solely and directly related to the
Reorganization within the meaning of Revenue Ruling 73-54, 1973-1 C.B. 187.
Acquired Fund Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization.
11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
11.1. The Acquiring Fund and the Acquired Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
11.2. Except as specified in the next sentence set forth in this section
11.2, the representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall not
survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing and the obligations of each of the
Acquiring Fund and Acquired Fund in Sections 9.1 and 9.2 shall survive the
Closing.
12. TERMINATION
12.1. This Agreement may be terminated and the transactions contemplated
hereby may be abandoned by either party by (i) mutual agreement of the parties,
or (ii) by either party if the Closing shall not have occurred on or before
October 31, 2000, unless such date is extended by mutual agreement of the
parties, or (iii) by either party if the other party shall have materially
breached its obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any party or their respective Board members or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
A-19
<PAGE>
13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by any authorized officer of the Acquired
Fund and any authorized officer of the Acquiring Fund; provided, however, that
following the meeting of the Acquired Fund Shareholders called by the Acquired
Fund pursuant to section 5.3 of this Agreement, no such amendment may have the
effect of changing the provisions for determining the number of the Acquiring
Fund Shares to be issued to the Acquired Fund Shareholders under this Agreement
to the detriment of such shareholders without their further approval.
14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered by hand (including by Federal Express or similar express courier)
or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
Acquired Fund, Two International Place, Boston, MA 02110-4103, with a copy to
Dechert Price & Rhoads, Ten Post Office Square South, Boston, MA 02109-4603,
Attention: Sheldon A. Jones, Esq., or to the Acquiring Fund, Two International
Place, Boston, MA 02110-4103, with a copy to Dechert Price & Rhoads, Ten Post
Office Square South, Boston, MA 02109-4603, Attention: Sheldon A. Jones, Esq.,
or to any other address that the Acquired Fund or the Acquiring Fund shall have
last designated by notice to the other party.
15. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
15.1. The Article and section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
15.3. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and the shareholders of the
Acquiring Fund and the Acquired Fund and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
A-20
<PAGE>
15.4. References in this Agreement to the Trust mean and refer to the Board
members of the Trust from time to time serving under its Declaration of Trust on
file with the Secretary of State of the Commonwealth of Massachusetts, as the
same may be amended from time to time, pursuant to which the Trust conducts its
business. It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the Board members, shareholders, nominees,
officers, agents, or employees of the Trust or the Funds personally, but bind
only the respective property of the Funds, as provided in the Trust's
Declaration of Trust. Moreover, no series of the Trust other than the Funds
shall be responsible for the obligations of the Trust hereunder, and all persons
shall look only to the assets of the Funds to satisfy the obligations of the
Trust hereunder. The execution and the delivery of this Agreement have been
authorized by the Trust's Board members, on behalf of each Fund, and this
Agreement has been signed by authorized officers of each Fund acting as such,
and neither such authorization by such Board members, nor such execution and
delivery by such officers, shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the property of the Funds, as provided in the Trust's Declaration of
Trust.
Notwithstanding anything to the contrary contained in this Agreement, the
obligations, agreements, representations and warranties with respect to each
Fund shall constitute the obligations, agreements, representations and
warranties of that Fund only (the "Obligated Fund"), and in no event shall any
other series of the Trust or the assets of any such series be held liable with
respect to the breach or other default by the Obligated Fund of its obligations,
agreements, representations and warranties as set forth herein.
15.5. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the Commonwealth of Massachusetts, without regard
to its principles of conflicts of laws.
A-21
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by an authorized officer and its seal to be affixed thereto and
attested by its Secretary or Assistant Secretary.
Attest: SCUDDER TAX FREE TRUST
on behalf of Scudder Limited Term Tax Free Fund
- ------------------------------
Secretary
By: ------------------------------
Its: ------------------------------
Attest: SCUDDER TAX FREE TRUST
on behalf of Scudder Medium Term Tax Free Fund
- ------------------------------
Secretary
By: ------------------------------
Its: ------------------------------
AGREED TO AND ACKNOWLEDGED
ONLY WITH RESPECT TO
PARAGRAPH 10.2 HERETO
SCUDDER KEMPER INVESTMENTS, INC.
By:
- ------------------------------
Its:
- ------------------------------
A-22
<PAGE>
EXHIBIT B
MANAGEMENT'S DISCUSSION OF ACQUIRING FUND'S PERFORMANCE
Performance Update
as of May 31, 1999
- --------------------------------------------------------------------------------
Fund Index Comparisons
- --------------------------------------------------------------------------------
Total Return
- ----------------------------------------------------
Period Ended Growth of Average
5/31/1999 $10,000 Cumulative Annual
- ----------------------------------------------------
Scudder Medium Term Tax Free Fund
- ----------------------------------------------------
1 Year $ 10,379 3.79% 3.79%
5 Year $ 13,399 33.99% 6.03%
10 Year* $ 19,475 94.75% 6.89%
- ----------------------------------------------------
Lehman Brothers Municipal Bond Index
- ----------------------------------------------------
1 Year $ 10,467 4.67% 4.67%
5 Year $ 14,147 41.47% 7.18%
10 Year $ 21,062 110.62% 7.73%
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
*On November 1, 1990, the Fund adopted its present name and objectives. Prior
to that date, the Fund was known as the 1990 Portfolio of the Scudder Tax
Free Target Fund and its objective was to provide high tax-free income and
current liquidity. Since adopting its current objectives, the cumulative and
average annual total returns are 80.00% and 7.09%, respectively.
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
- --------------------------------------------------------------------------------
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
Scudder Medium Lehman Brothers
Term Tax Free Fund Municipal Bond Index
'89 10000 10000
'90 10594 10733
'91 11507 11814
'92 12642 12976
'93 14065 14529
'94 14535 14888
'95 15596 16243
'96 16315 16986
'97 17426 18395
'98 18764 20121
'99 19475 21062
Yearly periods ended May 31
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of the long-term, investment grade tax-exempt bond market consisting of
municipal bonds with a maturity of at least two years. Generally, the Index's
average effective maturity is longer than the Fund's. Index returns assume
dividends are reinvested and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased. If the Adviser had not temporarily capped expenses
for the period November 1, 1990 through October 31, 1995, the total returns of
the Fund for the five year and ten year periods would have been lower.
B-1
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
Following a series of overseas and domestic financial crises that prompted
uncertainty, volatility, and a "flight to quality," bond yields plummeted, then
returned to July 1998 levels by the close of Scudder Medium Term Tax Free Fund's
most recent fiscal year. During its abbreviated fiscal year beginning January 1,
1999, through May 31, 1999, the Fund returned -0.02%. Over the 12 months ended
May 31, the Fund returned 3.79%, outpacing the 3.72% average performance of the
Fund's peers over the same period as tracked by Lipper Analytical Services,
Inc., an independent analyst of investment performance. As of May 31, 1999,
Scudder Medium Term Tax Free Fund's 30-day net annualized SEC yield was 3.75%,
equivalent to a 6.21% taxable yield for investors subject to the 39.6% maximum
federal income tax rate.
Scudder Medium Term Tax Free Fund's long-term performance record remains highly
competitive: As shown in the accompanying table, the Fund's average annual total
returns placed it in the top one-third of its peers over three-, five-, and
ten-year periods. Please turn to the Performance Update for more information on
the Fund's long-term progress, including comparisons with the unmanaged Lehman
Brothers Municipal Bond Index.
A Market Roller Coaster
Market turmoil hit a peak in the wake of the Russian currency devaluation late
last summer, followed by the near collapse of the Long Term Capital Management
hedge fund. Volatility in the U.S. stock market increased greatly while a
massive reallocation to U.S. Treasury bonds led to substantially lower yields.
The Federal Reserve's three interest rate cuts during the third and fourth
quarters of 1998 helped to gradually restore market stability. During this
period, the U.S. economy continued to grow beyond all expectations, with a
dramatic 6% annualized increase in GDP for the fourth quarter of 1998 and a
strong start in 1999 that seemed to assure at least 4% GDP growth this year.
This show of strength, in turn, worried bond investors, who responded by sending
30-year Treasury bond yields back up to July 1998 levels. Over the twelve months
ended May 31, yields of 30-year Treasury bonds ended slightly higher, beginning
at 5.60% and ending at 5.84%. Over the same time frame, yields of 30-year AAA
insured municipal bonds rose slightly, from 5.10% to 5.22%.
B-2
<PAGE>
- --------------------------------------------------------------------------------
Competitive Long-Term Results
(Average annual returns for periods ended May 31, 1999)
- --------------------------------------------------------------------------------
Scudder
Medium Lipper Number
Term Tax average of
Free Fund annual Funds Percentile
Period return return Rank tracked Ranking
1 year 3.79% 3.72% 58 of 134 Top 43%
3 years 6.08% 5.85% 32 of 114 Top 28%
5 years 6.03% 5.81% 24 of 88 Top 27%
10 years 6.89% 6.58% 7 of 24 Top 29%
Past performance does not guarantee future results.
Lipper Analytical Services, Inc., is an independent analyst of investment
performance. Performance includes reinvestment of dividends and capital gains.
In addition to high tax free yields, municipal bonds have historically offered
greater price stability over time than Treasury bonds of comparable maturity.
The accompanying chart demonstrates the record over the past 12 months, when
most financial markets were at a peak of volatility.
- --------------------------------------------------------------------------------
Municipal Provided Greater Stability
Monthly prices of 30-year AAA-rated municipal bonds
compared with prices of 30-year U.S. Treasury bonds,
5/31/98-5/31/99.
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
30-year 30-year
AAA-rated U.S.
municipal bonds Treasury bonds
5/31/98 100.77 100.14
100.00 103.47
7/31/98 100.00 101.57
102.33 107.12
9/30/98 105.57 114.87
102.33 111.47
11/30/98 102.33 109.83
102.33 111.47
1/31/99 103.13 111.14
101.55 103.32
3/31/99 100.77 102.11
100.31 104.665
5/31/99 98.19 100.00
Past performance is not indicative of future results.
Source: Scudder Kemper Investments, Inc.
B-3
<PAGE>
Tax-Free Income and Below-Average Risk
Scudder Medium Term Tax Free Fund's primary investment goals are to generate
high federally tax-free income while maintaining a significant degree of price
stability. During the Fund's abbreviated fiscal year, we maintained a two-part
strategy: First, we focused on premium "cushion" bonds -- bonds with high
coupons that compensate investors for the fact that they can be redeemed by
their issuer prior to maturity. At the same time, we continued the Fund's strong
emphasis on call protection. (Generally a bond is called in by its issuer so
that it can be refinanced at a lower prevailing rate.) Our call-protection
strategy provides a more reliable income stream for the Fund than would exist if
the portfolio held a significant proportion of bonds that could be called in
before their stated maturities. In terms of maturity, we purchased 11- to
13-year bonds during the period, because we believe they offer the best total
return potential, based on our outlook for interest rates and the yield
differentials among bonds across the maturity spectrum.
The Fund continues its cautious stance on the market with respect to interest
rate risk, maintaining an average duration similar to that of its competitive
universe. As of May 31, 1999, the Fund's average duration was 5.3 years.
(Duration gives relative weight to both principal and interest payments through
the life of a bond and has replaced average maturity as the standard measure of
interest rate sensitivity among professional investors. Generally, the shorter
the duration, the less sensitive a portfolio will be to changes in interest
rates.)
The Fund's overall level of portfolio quality remains high, with over 70% of the
Fund's portfolio rated AAA or AA. Diversification remains an important strategy
for the Fund, allowing us to spread risk over a large number of sectors,
maturities, and geographic areas. As of May 31, 1999, the Fund held securities
issued in 36 states plus the District of Columbia and the Virgin Islands.
Outlook
In light of recent increases in short-term interest rates -- including an
increase in the Federal Funds target rate following the close of the period -- a
long-predicted slowdown in U.S. economic activity seems more likely to
B-3
<PAGE>
occur during the second half of 1999. At the same time, we expect that inflation
will remain restrained, which should place an upper limit on interest rate
increases. Though as a general rule we maintain a portfolio duration in line
with our market, we will take a cautious approach during the coming months. We
will also monitor the level of worldwide economic activity closely over the
remainder of the year: The United States has been the only significant engine of
economic growth for some time. If the incipient economic recovery in Asia and
other parts of the world gathers steam, we will watch for additional upward
pressure on inflation and short-term interest rates and adjust our strategy
accordingly.
In terms of the Fund's day-to-day strategy, we will continue to seek competitive
returns by focusing on 8- to 12-year premium cushion bonds and noncallable bonds
over the coming months. And rather than attempting to make investment decisions
based on short-term market movements, we will search for the most attractively
valued bonds as we seek a high level of tax-free income for our shareholders.
Sincerely,
Your Portfolio Management Team
/s/Ashton P. Goodfield /s/Philip G. Condon
Ashton P. Goodfield Philip G. Condon
B-4
<PAGE>
APPENDIX 1
FUND SHARES OWNED BY NOMINEES AND TRUSTEES
Many of the nominees and Trustees own shares of the series of the Trust and
of other funds in the Scudder Family of Funds and AARP Funds, allocating their
investments among such funds based on their individual investment needs. The
following table sets forth, for each nominee and Trustee, the number of shares
owned in each series of the Trust as of January 31, 2000. The information as to
beneficial ownership is based on statements furnished to the Trust by each
nominee and Trustee. Beneficial ownership is based on sole voting and investment
power. Each nominee's and Trustee's individual shareholdings of any series of
the Trust constitute less than 1% of the outstanding shares of such fund. The
Trustees and officers own less than 1% of the shares of any series of the Trust.
<TABLE>
<CAPTION>
SCUDDER LIMITED TERM SCUDDER MEDIUM TERM
TAX FREE FUND TAX FREE FUND
-------------------- --------------------
<S> <C> <C>
Henry P. Becton, Jr.(1)........................ 183 199
Linda C. Coughlin(1)........................... 0 0
Dawn-Marie Driscoll(1)......................... 112 1,849
Edgar R. Fiedler(1)............................ 0 41,758
Peter B. Freeman(1)............................ 106 174
Keith R. Fox(1)................................ 0 0
George M. Lovejoy, Jr.(1)...................... 0 13,061
Wesley W. Marple, Jr.(1)....................... 132 2,665
Kathryn L. Quirk(2)............................ 0 0
Joan Edelman Spero(2).......................... 0 93
Jean Gleason Stromberg(2)...................... 0 0
Jean C. Tempel(1).............................. 1,076 1,187
Steven Zaleznick(3)............................ 0 0
All Trustees and Officers as a Group........... 1,609 60,986
</TABLE>
- ------------------------------
(1) Total aggregate holdings in each series of the Trust listed and all other
funds in the Scudder Family of Funds and AARP Funds were over $100,000.
(2) Total aggregate holdings in each series of the Trust listed and all other
funds in the Scudder Family of Funds and AARP Funds ranged between $50,000
and $100,000.
(3) Total aggregate holdings in each series of the Trust listed and all other
funds in the Scudder Family of Funds and AARP Funds were $0.
<PAGE>
APPENDIX 2
BENEFICIAL OWNERSHIP OF FUND SHARES
As of January 31, 2000, 4,977,918 shares in the aggregate, or 9.80% of the
outstanding shares, of SCUDDER MEDIUM TERM TAX FREE FUND were held in the name
of Charles Schwab, 101 Montgomery Street, San Francisco, CA 94104, who may be
deemed to be the beneficial owner of certain of these shares.
As of January 31, 2000, 606,676 shares in the aggregate, or 9.21% of the
outstanding shares, of SCUDDER LIMITED TERM TAX FREE FUND were held in the name
of Charles Schwab, 101 Montgomery Street, San Francisco, CA 94104, who may be
deemed to be the beneficial owner of certain of these shares.
As of January 31, 2000, 445,214 shares in the aggregate, or 6.75% of the
outstanding shares, of SCUDDER LIMITED TERM TAX FREE FUND were held in the names
of Linda McKean and Gordon Litwin, for the estate of A. Shaw McKean, Jr., who
may be deemed to be the beneficial owners of certain of these shares.
SCUDDER KEMPER'S OWNERSHIP OF FUND SHARES
Certain accounts for which Scudder Kemper acts as investment adviser owned
7,515,368 shares in the aggregate, or 14.79% of the outstanding shares, of
SCUDDER MEDIUM TERM TAX FREE FUND on January 31, 2000. Scudder Kemper may be
deemed to be the beneficial owner of such shares, but disclaims any beneficial
ownership in such shares.
Certain accounts for which Scudder Kemper acts as investment adviser owned
3,009,091 shares in the aggregate, or 45.68% of the outstanding shares, of
SCUDDER LIMITED TERM TAX FREE FUND on January 31, 2000. Scudder Kemper may be
deemed to be the beneficial owner of such shares, but disclaims any beneficial
ownership in such shares.
<PAGE>
For more information, please call Shareholder Communications
Corporation, your Fund's information agent at 1-800-603-1915.
SD Ltd Term Tx Fr
<PAGE>
This proxy statement/prospectus is accompanied by the Acquiring Fund's
prospectus dated October 1, 1999, which was previously filed with the Commission
via EDGAR on September 29, 1999 (File No. 2-81105) and is incorporated by
reference herein.
<PAGE>
PART B
SCUDDER TAX FREE TRUST
- --------------------------------------------------------------------------------
Statement of Additional Information
April 18, 2000
- --------------------------------------------------------------------------------
Acquisition of the Assets of Scudder By and in Exchange for Shares of
Limited Term Tax Free Fund (the Scudder Medium Term Tax Free Fund
"Acquired Fund"), a series of (the "Acquiring Fund"), a series
Scudder Tax Free Trust (the "Trust") of the Trust
Two International Place Two International Place
Boston, MA 02110-4103 Boston, MA 02110-4103
This Statement of Additional Information is available to the shareholders of
the Acquired Fund in connection with a proposed transaction whereby the
Acquiring Fund will acquire all or substantially all of the assets and all of
the liabilities of the Acquired Fund in exchange for shares of the Acquiring
Fund (the "Reorganization").
This Statement of Additional Information of the Trust contains material which
may be of interest to investors but which is not included in the
Prospectus/Proxy Statement of the Trust relating to the Reorganization. This
Statement of Additional Information consists of this cover page and the
following documents:
1. The Acquiring Fund's statement of additional information dated October
1, 1999, which was previously filed with the Securities and Exchange
Commission (the "Commission") via EDGAR on September 29, 1999 (File No.
2-81105) and is incorporated by reference herein.
2. The Acquiring Fund's annual report to shareholders for the fiscal year
ended May 31, 1999, which was previously filed with the Commission via EDGAR
on July 26, 1999 (File No. 811-03632) and is incorporated by reference herein.
3. The Acquired Fund's prospectus dated October 1, 1999, which was
previously filed with the Commission via EDGAR on September 29, 1999 (File
No. 2-81105) and is incorporated by reference herein.
4. The Acquired Fund's statement of additional information dated October 1,
1999, which was previously filed with the Commission via EDGAR on September
29, 1999 (File No. 2-81105) and is incorporated by reference herein.
5. The Acquired Fund's annual report to shareholders for the fiscal year
ended May 31, 1999, which was previously filed with the Commission via EDGAR
on July 2, 1999 (File No. 811-03632) and is incorporated by reference herein.
6. The financial statements and schedules of the Acquiring Fund and the
Acquired Fund required by Regulation S-X for the periods specified in Article
3 thereof, which are filed herein.
-50-
<PAGE>
This Statement of Additional Information is not a prospectus. A
Prospectus/Proxy Statement dated April 18, 2000 relating to the Reorganization
may be obtained by writing the Acquired Fund at Two International Place, Boston,
MA 02110-4103 or by calling Scudder Investor Services, Inc. at 1-800-225-2470.
This Statement of Additional Information should be read in conjunction with the
Prospectus/Proxy Statement.
-51-
<PAGE>
PRO FORMA
PORTFOLIO OF INVESTMENTS
AS OF OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
---------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS 2.6%
- ------------------------------------------
ALASKA
<S> <C> <C> <C> <C> <C> <C>
Valdez, AK, Marine Terminal Revenue, 1,000,000 1,000,000 1,000,000 1,000,000
Exxon Pipeline Project B, 3.750%,
12/1/2033
ARIZONA
Maricopa County, AZ, Pollution Control 1,400,000 1,400,000 1,400,000 1,400,000
Revenue, Arizona Public Service
Corporation, Series F, Daily Demand
Note, 4.500%, 05/01/2029
FLORIDA
Hillsborough County, FL, Industrial 2,000,000 2,000,000 2,000,000 2,000,000
Development Authority, 2.700%,
9/1/2025
ILLINOIS
Chicago, IL, O'Hare International 1,000,000 1,000,000 1,000,000 1,000,000
Airport Revenue Bonds, American
Airlines Project, Series 1983 A, Daily
Demand Note, 5.000%, 12/01/2017
Chicago,IL, O'Hare International 1,800,000 1,800,000 1,800,000 1,800,000
Airport, American Airlines, 1983
Series B, Daily Demand Note, 4.750%,
12/1/2017
INDIANA
Jasper County, IN, Pollution Control 1,000,000 1,000,000 1,000,000 1,000,000
Revenue, Northern Indiana Public
Services, Series C, Daily Demand Bond,
4.500%, 04/01/2019
NEW YORK
New York State Energy Research and 2,500,000 2,500,000 2,500,000 2,500,000
Development Authority, 2.800%,
12/1/2025
TEXAS
Harris County, TX, Health Facilities, 3,500,000 2,500,000 6,000,000 3,500,000 2,500,000 6,000,000
Revenue, Saint Lukes Episcopal
Hospital, Series A, 3.700%, 02/15/2027
Harris County, TX, Health Facilities, 1,000,000 1,000,000 1,000,000 1,000,000
Revenue, St Lukes Episcopal Hospital,
Series B, 3.800%, 02/15/2027
====================================
SHORT-TERM MUNICIPAL INVESTMENTS 7,800,000 9,900,000 17,700,000
====================================
SHORT-TERM MUNICIPAL INVESTMENTS (COST OF
$7,800,000 $9,900,000 AND $17,700,000
RESPECTIVELY)
LONG-TERM MUNICIPAL INVESTMENTS 97.4%
- -----------------------------------------
ALABAMA
Alabama Street Docks Department, 1,000,000 1,000,000 1,062,690 1,062,690
Facilites Revenue, Series 1998,
6.000%, 10/01/2007
ALASKA
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North Slope Borough, AK, General 11,150,000 11,150,000 7,912,263 7,912,263
Obligation, Capital Appreciation,
Series 1995 A, Zero Coupon, 06/30/2006
North Slope Borough, AK, General 3,275,000 3,275,000 2,891,530 2,891,530
Obligation, Series 1992 A, Zero Coupon,
6/30/2002
North Slope Borough, AK, General 7,000,000 7,000,000 5,871,250 5,871,250
Obligation, Series 1992 A, Zero Coupon,
6/30/2003
North Slope Borough, AK, General 19,500,000 19,500,000 15,484,170 15,484,170
Obligation, Capital Appreciation,
Series 1994 B, Zero Coupon, 06/30/2004
ARIZONA
Central Arizona Water Conservation 1,000,000 1,000,000 1,054,630 1,054,630
District, Central Arizona Project,
Prerefunded 11/1/2000, 7.500%,
11/1/2005
Central Arizona Water Conservation 1,195,000 1,195,000 1,257,319 1,257,319
District Contract Revenue, Prerefunded
5/01/2001, Series 1991 B, 6.500%,
11/1/11
Arizonia Health Facilities Authority, 2,000,000 2,000,000 2,110,080 2,110,080
Phoenix Baptist Hospital and Medical
Center, ETM, Serries 1992, 6.100%, 09/01/2003
Maricopa County, AZ, Unified School 2,925,000 2,925,000 2,138,380 2,138,380
District #41, Series 1994 B Gilbert School,
Zero Coupon, 01/01/2006
Maricopa County, AZ, School District 4,150,000 4,150,000 3,572,486 3,572,486
#28, Kyrene Elementary, Series 1993 B,
Zero Coupon, 01/01/2003
Maricopa County, AZ, School District 2,000,000 2,000,000 1,681,480 1,681,480
#28, Kyrene Elementary, Series 1993 B, Zero
Coupon, 07/01/2003
Maricopa County, AZ, Unified School 4,500,000 4,500,000 3,783,330 3,783,330
District #41, Capital Appreciation
Bond, Series 1993, Zero Coupon, 07/01/2003
Maricopa County, AZ, Unified School 6,000,000 6,000,000 4,896,720 4,896,720
District #41, Capital Appreciation
Bond, Series 1993, Zero Coupon, 01/01/2004
Maricopa County, AZ, Unified School 7,605,000 7,605,000 5,420,464 5,420,464
District #41, Capital Appreciation
Bond, Series 1994, Zero Coupon, 07/01/2006
Maricopa County, AZ, Unified School 1,790,000 1,790,000 1,349,696 1,349,696
District #41, Gilbert School, Capital
Appreciation Refunding, General
Obligation, Series 1994, Zero Coupon, 07/01/2005
Salt River Project, AZ, Agricultural 1,500,000 1,500,000 1,568,820 1,568,820
Improvement and Power District,
Electrical Systems Revenue, Series 1992 C
6.2%, 1/1/2012
ARKANSAS
Rogers, AR, Sales & Use Tax Revenue, 2,500,000 2,500,000 2,533,925 2,533,925
Series 1996, 5.350%, 11/01/2011
Rogers, AR, Sales and Use Tax Revenue, 660,000 660,000 656,832 656,832
Series 1996, 5.000%, 11/01/2015
CALIFORNIA
California Health Facilities Finance 3,150,000 3,150,000 3,362,688 3,362,688
Authority Revenue Bond, Summit Medical
Center, Series 1996 A, 6.000%, 05/01/2006
Foothill/Eastern Transportation 1,000,000 1,000,000 785,610 785,610
Corridor Agency, CA, Toll Road
Revenue, Senior Lien, Series A, Zero
Coupon, 01/01/2005
Foothill Eastern Transportation 7,275,000 7,275,000 5,980,778 5,980,778
Corridor Agency, CA, Toll Road
Revenue, Senior Lien,
Series 1995 A,
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Step-up Coupon, 0% to 1/1/2005, 7.05%
to 1/1/2009, 01/01/2009
Long Beach, CA, Aquarium of the 1,300,000 1,300,000 1,323,452 1,323,452
Pacific Project, 5.750%, Series 1995 A, 07/01/2005
Orange County, CA, Local 5,100,000 5,100,000 5,125,704 5,125,704
Transportation Authority, Sales Tax
Revenue, Series 1994 M, Step-up Coupon,
5.10% to 2/15/1998, 4/30% to 2/15/2001,
Sacramento, CA, Cogeneration Project Revenue, 1,000,000 1,000,000 1,084,490 1,084,490
Procter & Gamble Project, Series 1995,
7.0%, 7/1/2004
COLORADO
Boulder County, CO, Industrial 3,500,000 1,250,000 4,750,000 3,597,860 1,284,950 4,882,810
Development, Revenue Refunding, May
Department Stores, Colorado Project,
Series 1992, 6.250%, 09/01/2007
CONNECTICUT
Bristol, CT, Resource Recovery, Ogden 8,750,000 8,750,000 8,826,213 8,826,213
Martin System, Series 1995, 6.125%, 07/01/2003
Connecticut State Health & Educational 3,300,000 3,300,000 3,054,843 3,054,843
Facilities Authority, Windham
Community Memorial Hospital, Series
1996 C, 5.750%, 07/01/2011
DELAWARE
Delaware State Health Facilities 1,500,000 1,500,000 1,533,570 1,533,570
Authorities Revenue Bonds, Medical
Center of Delaware, Series 1989,
7.000%, 10/01/2003
DISTRICT OF COLUMBIA
District of Columbia, General 100,000 100,000 100,609 100,609
Obligation, Series 1993 A, ETM, 4.850%,
6/1/2004
District of Columbia, General 1,900,000 1,900,000 1,898,366 1,898,366
Obligation, Series 1993 A, 4.850%, 06/01/2004
District of Columbia, General 195,000 195,000 196,316 196,316
Obligation, Series 1993 A, ETM, 4.950%,
6/1/2005
District of Columbia, General 3,745,000 3,745,000 3,733,990 3,733,990
Obligation, Series 1993 A, 4.950%, 06/01/2005
District of Columbia, General 40,000 40,000 41,032 41,032
Obligation, Series D,, 5.250%,
12/1/2003
District of Columbia, General 960,000 960,000 977,424 977,424
Obligation, Series D,, 5.250%,
12/1/2023
District of Columbia , General 110,000 110,000 113,150 113,150
Obligation, Series A, 5.625%,
6/1/2002
District of Columbia , General 1,390,000 1,390,000 1,424,681 1,424,681
Obligation, Series A, 5.625%,
6/1/2002
District of Columbia, Prerefunded, 600,000 600,000 617,184 617,184
Series 1993 A, ETM, 5.625%, 06/01/2002
District of Columbia, Prerefunded 510,000 510,000 532,889 532,889
Series 1993 A, 5.800%, 06/01/2004
District of Columbia, Unrefunded 6,440,000 6,440,000 6,729,027 6,729,027
Balance, Series 1993 A, 5.800%, 06/01/2004
District of Columbia, Prerefunded, 265,000 265,000 278,674 278,674
Series 1993 A, ETM, 5.875%, 06/01/2005
District of Columbia, Unrefunded 3,385,000 3,385,000 3,526,019 3,526,019
Balance, Series 1993 A, 5.875%, 06/01/2005
District of Columbia, Certificate of 1,780,000 1,780,000 1,816,704 1,816,704
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Participation, Series 1993 6.875%, 01/01/2003
District of Columbia, Redevelopment 1,550,000 1,550,000 1,571,716 1,571,716
Land Agency, DC Sports Arena, Special Tax,
Series 1996, 5.625%, 11/1/2010
District of Columbia Water and Sewer 3,630,000 3,630,000 3,761,805 3,761,805
Authority, Public Utility Revenue,
6.000%, 10/01/2013
District of Columbia, Unrefunded 7,760,000 7,760,000 7,982,246 7,982,246
Balance, Series 1996 A, 5.625%, 06/01/2002
District of Columbia, General 7,100,000 7,100,000 6,618,620 6,618,620
Obligation, Refunding, Series 1989 B, Zero
Coupon, 06/01/2001
District of Columbia, General 8,000,000 8,000,000 8,111,520 8,111,520
Obligation, Refunding, Series 1993 B,
5.300%, 06/01/2005
District of Columbia, General 2,000,000 2,000,000 2,045,940 2,045,940
Obligation, Series B, 5.500%,
6/1/2007
FLORIDA
Dade County, FL, General Obligation 4,000,000 4,000,000 1,612,320 1,612,320
Series 1990 , Prerefunded
2/1/2006, Zero Coupon, 08/01/2014
Dade County, FL, General Obligation 6,000,000 6,000,000 1,773,120 1,773,120
Series 1990 , Prerefunded
2/1/2006, Zero Coupon, 08/01/2018
Dade County, FL, Port Authority 4,015,000 4,015,000 4,107,385 4,107,385
Revenue, Series 1968 C, 5.500%,
10/1/2007
Florida Department of Environmental 7,000,000 7,000,000 7,354,970 7,354,970
Protection, Revenue Bond, Series B,
6.000%, 07/01/2012
GEORGIA
Georgia, General Obligation, Series 1995 A, 5,370,000 5,370,000 6,057,306 6,057,306
6.750%, 09/01/2010
Municipal Electric Authority of 1,000,000 1,000,000 1,026,060 1,026,060
Georgia, Power Revenue, 6.600%,
1/1/2001
HAWAII
Hawaii State General Obligation, 7,050,000 7,050,000 6,707,229 6,707,229
Series 1993 C, 4.750%,
11/1/2008
Honolulu, HI, General Obligation, 4,130,000 4,130,000 4,174,150 4,174,150
5.500%, 11/01/2010
ILLINOIS
Alton, IL, Health Facilites Revenue, 555,000 555,000 559,501 559,501
Series 1991, ETM, 6.700%, 02/15/2000
Berwyn, IL, Hospital Revenue, MacNeal 3,935,000 3,935,000 3,989,185 3,989,185
Memorial Hospital, Series 1995,
5.250%, 06/01/2004
Chicago, IL, General Obligation, 3,450,000 3,450,000 3,615,531 3,615,531
Tender Note, Series C, 6.250%,
10/31/2002
Chicago, Illinois, Water Revenue, 5,000,000 5,000,000 2,543,450 2,543,450
Capital Appreciation, Series 1997,
Zero Coupon, 11/01/2011
Cook County, IL, General Obligation, 3,060,000 3,060,000 2,949,381 2,949,381
Series 1999 B, 5.125%, 11/15/2011
Cook County, IL, Comunity Unit School 2,180,000 2,180,000 1,423,387 1,423,387
District 401, Elmwood Park, Series 1997
Zero Coupon, 12/01/2007
Hoffman Estates, IL, Tax Increment 8,500,000 8,500,000 6,005,250 6,005,250
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue, Capital Appreciation, Junior
Lien, Series 1991, Zero Coupon,
5/15/2006
Hoffman Estates, IL, Tax Increment 2,450,000 2,450,000 1,941,919 1,941,919
Revenue, Capital Appreciation, Junior
Lien, Hoffman Estates, Revenue Bond,
Series 1991, Zero Coupon, 05/15/2004
Illinois, General Obligation, Series 1994, 5,000,000 5,000,000 4,902,600 4,902,600
4.60%, 12/1/2005
Illinois Development Finance Authority 7,500,000 7,500,000 7,635,150 7,635,150
Refunding Revenue, Commonwealth
Edison, Series 1994, 5.300%,
1/15/2004
Illinois Educational Facilities 2,130,000 2,130,000 1,883,048 1,883,048
Authority Revenue, Loyola University,
Revenue Refunding, Series 1991 A, ETM,
Zero Coupon, 07/01/2002
Illinois Health Facilities Authority, 1,240,000 1,240,000 1,271,967 1,271,967
Evangelical Hospitals, Series 1992 B,
ETM, 6.100%, 04/15/2001
Illinois Health Facilities Authority 1,245,000 1,245,000 1,280,794 1,280,794
Revenue, Methodist Medical Center,
Revenue Bond, 5.500%, 11/15/2004
Illinois Health Facilities Authority, 1,025,000 1,025,000 1,064,411 1,064,411
Revenue Refunding, Sherman Hospital
Project, 6.500%, 08/01/2001
Illinois Health Facilities Authority, 1,500,000 1,500,000 1,518,420 1,518,420
Sisters Services, Series C,, 6.100%,
6/1/2000
Illinois Health Facilities Authority, 1,900,000 1,900,000 1,953,599 1,953,599
Sisters Services, Series C, 6.200%,
6/1/2001
Illinois State Toll Highway Authority, 3,200,000 3,200,000 3,152,640 3,152,640
Toll Highway Priority Revenue Bond,
Series A, 5.500%, 01/01/2013
Kendall, Kane and Will Counties, IL, 1,345,000 1,345,000 1,145,012 1,145,012
School District, Zero Coupon,
3/1/2003
Macon and Decatur County, IL, Public 1,320,000 1,320,000 1,325,399 1,325,399
Building Commission, Certificate of
Participation, General Obligation,
6.300%, 01/01/2000
Metropolitan Pier and Exposition 10,500,000 10,500,000 8,343,405 8,343,405
Authority of Illinois, McCormick Place
Expansion Project, Coupon Receipts,
Zero Coupon, 06/15/2004
Rosemont, IL, Tax Increment-2, 2,785,000 2,785,000 2,409,081 2,409,081
Secondary, Series B, Zero Coupon,
12/1/2002
Rosemont, IL, Tax Increment-3, 3,345,000 3,345,000 2,893,492 2,893,492
Secondary, Series C, Zero Coupon,
12/1/2002
INDIANA
Indiana Health Facility Finance 1,000,000 1,000,000 1,032,150 1,032,150
Authority, Hospital Revenue, Ancilla
Systems Inc., Series A, 5.875%,
7/1/2002
Indiana Housing Finance Authority, 295,000 420,000 715,000 295,929 421,323 717,252
Single Family Mortgage Revenue, Series
1995 C-1, 5.250%, 07/01/2012
Indianapolis, IN, Resource Recovery 6,000,000 6,000,000 6,565,920 6,565,920
Revenue, Ogden Martin Systems Inc.
Project, 6.750%, 12/01/2007
Madison County, IN, Hospital 1,385,000 1,385,000 1,477,158 1,477,158
Authority, Holy Cross Health System,
6.700%, 12/01/2002
IOWA
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cedar Rapids, IA, Hospital Facilities 490,000 490,000 506,033 506,033
Revenue, 5.650%, 05/15/2002
Cedar Rapids, IA, Hospital Facilities, 760,000 760,000 781,044 781,044
ST. Lukes Methodist Hospital, 5.650%,
8/15/2002
Iowa Certificate of Participation, 5,000,000 5,000,000 5,209,950 5,209,950
1992 Series A, 6.250%, 07/01/2002
KANSAS
Kansas City, KS, Utility System 3,850,000 3,850,000 3,288,247 3,288,247
Revenue, Zero Coupon, 03/01/2003
Kansas City, KS, Utility System 2,750,000 2,750,000 2,347,208 2,347,208
Revenue, Zero Coupon, 03/01/2003
LOUISIANA
Jefferson Parish, LA, School Board 5,055,000 5,055,000 5,404,604 5,404,604
Sales & Use Tax Revenue, Escrowed to
Maturity, Series 1986A, 7.350%,
2/1/2003
Jefferson Parish, LA, School Board 6,135,000 6,135,000 6,353,345 6,353,345
Sales & Use Tax Revenue, ETM, Series
1986 A, 7.250%, 02/01/2001
Lousiana Housing Finance Agency, 1,185,000 1,185,000 1,147,933 1,147,933
Mortgage Revenue Refunding, Single
Family, Series 1995 C-1, 5.125%,
12/1/2010
Louisiana State, General Obligation, 1,000,000 1,000,000 1,039,360 1,039,360
Series 1996 A, 6.000%, 08/01/2002
Orleans, LA, Levee District, Levee 1,755,000 1,755,000 1,778,236 1,778,236
Improvement Bonds, Series 1986,
5.950%, 11/01/2014
MASSACHUSETTS
Massachusetts General Obligation, 4,000,000 4,000,000 3,905,240 3,905,240
Series C, 5.250%, 08/01/2012
Massachusetts General Obligation, 2,150,000 2,150,000 2,257,350 2,257,350
Refunding, Series B, 6.375%,
8/1/2002
Massachusetts General Obligation, 1,000,000 1,000,000 1,062,480 1,062,480
Series A, 6.400%, 08/01/2003
Massachusetts Housing Finance Agency, 2,000,000 2,000,000 2,050,820 2,050,820
1992 Series C, 6.250%, 05/15/2002
Massachusetts Housing Finance Agency, 3,420,000 3,420,000 3,528,551 3,528,551
1992 Series C, 6.250%, 11/15/2002
Massachusetts Industrial Finance 3,250,000 3,250,000 3,327,545 3,327,545
Agency, Resource Recovery, North
Andover Solid Waste, Series A, 6.150%,
7/1/02
Massachusetts Industrial Finance 1,545,000 1,545,000 1,580,381 1,580,381
Agency, Sturdy Memorial Hospital,
7.900%, 06/01/2009
Massachusetts Water Resource 1,000,000 1,000,000 1,031,480 1,031,480
Authority, Series A, 7.250%,
4/1/2001
Massachusetts Water Resourse 2,940,000 2,940,000 3,142,801 3,142,801
Authority, 6.000%, 08/01/2020
New England Education Loan Marketing 2,000,000 2,000,000 2,034,760 2,034,760
Corporation, Massachusetts Student
Loan Revenue Refunding, Series D,
6.200%, 09/01/2000
MICHIGAN
Detroit, MI, City School District, 1,000,000 1,000,000 963,470 963,470
Refunded, Series C, 5.250%, 05/01/2013
Forest Hills, Michigan Public Schools, 1,525,000 1,525,000 1,433,592 1,433,592
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/2013
Michigan Municipal Bond Authority, 4,750,000 4,750,000 3,386,655 3,386,655
Local Government Loan Program, School
Improvement, Zero Coupon, 06/15/2006
Romulus Township, MI, School District, 12,400,000 12,400,000 3,084,004 3,084,004
Series II, Zero Coupon, Prerefunded
5/1/2007, 05/01/2022
MISSISSIPPI
Mississippi Higher Education 1,200,000 1,200,000 1,233,864 1,233,864
Assistance Corp., Student Loan
Revenue, 1992 Series A, 6.200%,
1/1/2002
NEVADA
Clark County, NV, School District, 5,000,000 5,000,000 4,779,300 4,779,300
General Obligation, 5.250%, 06/15/2013
Clark County, NV, School District, 7,000,000 7,000,000 7,616,980 7,616,980
General Obligation, Building and
Renovation, Series B, 6.500%,
6/15/2007
Nevada State Housing Division, Single 1,225,000 1,225,000 1,240,190 1,240,190
Family Mortgage Revenue, Series R,
5.950%, 10/01/2011
NEW HAMPSHIRE
New Hampshire, Higher Education & 1,300,000 1,300,000 1,204,944 1,204,944
Health Authority Revenue, 5.750%,
8/1/2011
NEW JERSEY
New Jersey Economic Development 2,500,000 2,500,000 2,733,000 2,733,000
Authority, Series A, 7.000%,
7/1/2004
New Jersey Economic Development 2,000,000 2,000,000 2,060,220 2,060,220
Authority, Series A, 5.375%,
5/1/2006
New Jersey State Turnpike Authority, 1,220,000 1,220,000 1,235,762 1,235,762
Series C, Revenue Bond, 5.200%,
1/1/2008
NEW YORK
Metropolitan Transportation Authority 1,200,000 1,200,000 1,221,984 1,221,984
of New York, Commuter Facilities
Revenue, 6.750%, 07/01/2000
Metropolitan Transportation Authority 2,270,000 2,270,000 2,311,586 2,311,586
of New York, Transit Facilities
Revenue, Service Contract, 6.750%,
7/1/2000
Metropolitan Transportation Authority 1,280,000 1,280,000 1,329,971 1,329,971
of New York, Commuter Facilities
Revenue, 6.900%, 07/01/2001
Metropolitan Transportation Authority 2,415,000 2,415,000 2,509,282 2,509,282
of New York, Transit Facilities
Revenue, Service Contract Lease
Revenues, 6.900%, 07/01/2001
Metropolitan Transportation Authority 1,975,000 1,975,000 2,039,049 2,039,049
of New York, Transit Facilities
Revenue, Service Contract, Series O,
5.750%, 07/01/2007
New York City, General Obligation, 2,560,000 2,560,000 2,708,710 2,708,710
Series A, 6.000%, 08/01/2005
New York City, General Obligation, 50,000 50,000 52,878 52,878
Series C, 6.300%, 08/01/2003
New York City, NY, General Obligation, 1,000,000 1,000,000 961,240 961,240
Series 1991 A, 3.000%, 08/15/2002
New York City, NY, General Obligation, 1,315,000 1,315,000 1,404,381 1,404,381
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series 1995 D, 6.500%, 02/15/2005
New York City, NY, General Obligation, 2,500,000 2,500,000 2,681,400 2,681,400
Series 1995 E, 6.600%, 08/01/2004
New York City, NY, General Obligation, 1,500,000 1,500,000 1,618,275 1,618,275
Series 1996 A, 6.750%, 08/01/2004
New York City, NY, General Obligation, 5,000,000 5,000,000 5,493,750 5,493,750
Series 1996 G, 6.750%, 02/01/2009
New York City, NY, General Obligation, 7,000,000 6,000,000 13,000,000 7,477,260 6,409,080 13,886,340
Series 1995 B, 6.750%, 08/15/2003
New York City, NY, General Obligation, 2,000,000 2,000,000 2,209,840 2,209,840
Series 1996 A, 7.000%, 08/01/2006
New York City, NY, General Obligation, 1,575,000 1,575,000 1,683,565 1,683,565
Series 1996 I, 6.500%, 03/15/2005
New York City, NY, General Obligation, 1,000,000 1,000,000 1,062,040 1,062,040
Series 1997 I, 6.250%, 04/15/2006
New York City, NY, General Obligation, 7,650,000 7,650,000 8,326,796 8,326,796
Series A, 7.000%, 08/01/2004
New York City, NY, General Obligation 9,995,000 9,995,000 10,723,436 10,723,436
Prefunded, Series B, 6.600%,
10/1/2003
New York City, NY, General Obligation 205,000 205,000 217,819 217,819
Unrefunded Balance, Series B, 6.600%,
10/1/2003
New York City, NY, General Obligation, 2,900,000 2,900,000 3,266,792 3,266,792
Series B, 7.250%, 08/15/2007
New York State, Revenue Bonds Dorm 1,900,000 1,900,000 1,961,902 1,961,902
Authorization, 7.000%, 05/15/2016
New York State Dormitory Authority, 8,000,000 8,000,000 8,172,400 8,172,400
City University System, Consolidated
Revenue Lease, Series A, 5.500%,
7/1/2003
New York State Dormitory Authority, 1,750,000 1,750,000 1,828,593 1,828,593
Cons City University System, 5.750%,
7/1/2006
New York State Dormitory Authority, 220,000 220,000 223,956 223,956
College and University Pooled Capital
Program, 7.800%, 12/01/2005
New York State Dormitory Authority, 1,000,000 1,000,000 1,067,800 1,067,800
State University Educational Facility,
Series A, 6.500%, 05/15/2004
New York State Energy Research and 5,200,000 5,200,000 5,498,428 5,498,428
Development Authority, Pollution
Control Revenue, Electric and Gas,
5.900%, 12/01/2006
New York State Medical Care 4,920,000 760,000 5,680,000 5,065,976 782,549 5,848,525
Facilities, Finance Agency Revenue,
Mount Sinai Hospital, 5.950%,
8/15/2009
New York State Thruway Authority, 3,155,000 3,155,000 2,846,725 2,846,725
Special Obligation, Zero Coupon,
1/1/2002
New York State Urban Development Corp. 3,500,000 3,500,000 3,577,035 3,577,035
Revenue, Correctional Facilities,
Series A, 5.300%, 01/01/2005
New York State Urban Development 1,445,000 1,445,000 1,505,863 1,505,863
Corporation Project, Onondaga County
Convention Center, 6.000%, 01/01/2004
New York State Urban Development 1,535,000 1,535,000 1,602,647 1,602,647
Corporation Project, Onondaga County
Convention Center, 6.000%, 01/01/2005
New York, NY, Prerefunded, Series B, 1,605,000 1,605,000 1,692,055 1,692,055
6.400%, 10/01/2002
New York, NY, Unrefunded Balance, 3,300,000 3,300,000 3,458,697 3,458,697
Series B, 6.400%, 10/01/2002
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York, NY, General Obligation, 505,000 505,000 521,741 521,741
Unlimited Prerefunded, Series H,
6.900%, 02/01/2001
Syracuse, NY, Industrial Development 1,200,000 1,200,000 1,207,404 1,207,404
Agency, Pilot Revenue Bonds, Series
1995, 5.125%, 10/15/2002
NORTH CAROLINA
North Carolina Municipal Power Agency 1,150,000 1,150,000 1,177,911 1,177,911
#1, Catawaba Electric Revenue, 5.750%,
1/1/2002
North Carolina, Municipal Power Agency 2,550,000 2,550,000 2,639,021 2,639,021
No. 1, Catawba Electric Revenue,
Series 1992, 5.900%, 01/01/2003
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, 2,850,000 2,850,000 2,792,202 2,792,202
Hospital Revenue, St. Alexius Medical
Center, Series 1991, Zero Coupon,
5/1/2000
Grand Forks, ND, Health Care 1,160,000 1,160,000 1,207,908 1,207,908
Facilities, United Hospital Obligation
Group, Series A, 6.000%, 12/01/2002
OHIO
Franklin County, OH, Health Care 1,000,000 1,000,000 929,560 929,560
Facilities Revenue, 5.400%, 07/01/2010
Franklin County, OH, Health Care 1,000,000 1,000,000 947,550 947,550
Facilties Revenue, 5.150%, 07/01/2007
Hamilton County, OH, Health System 4,495,000 4,495,000 4,771,577 4,771,577
Revenue, Franciscan Sisters of the
Poor Health System, Providence
Hospital, Series 1992, 6.375%,
7/1/2004
Ohio State Building Authority, Adult 3,325,000 3,325,000 3,351,999 3,351,999
Correctional Facilities, Series A,
5.500%, 10/01/2011
OREGON
Chemeketa, OR, Community College 2,170,000 2,170,000 2,167,830 2,167,830
General Obligation, 5.500%, 06/01/2013
PENNSYLVANIA
Armstrong County, PA, Hospital 3,090,000 3,090,000 3,238,166 3,238,166
Authority, St. Frances Medical Center,
Series A, 6.200%, 06/01/2003
Montgomery County, PA, Redevelopment 2,685,000 2,685,000 2,703,177 2,703,177
Authority, Multi Family Housing
Revenue Refunding, KBF Associates, LP
Project, 6.000%, 07/01/2004
Schuykill County, PA, Redevelopment 1,105,000 1,105,000 1,122,050 1,122,050
Authority, Lease Rental, Series A,
6.550%, 06/01/2000
Scranton-Lackawanna, PA, Health & 2,725,000 2,725,000 2,766,066 2,766,066
Welfare Authority, 5.500%, 07/01/2008
Somerset County, PA, General 2,000,000 2,000,000 2,048,640 2,048,640
Authority, Commonwealth Lease Revenue,
ETM, 6.450%, 10/15/2000
SOUTH CAROLINA
South Carolina Jobs Economic 3,000,000 3,000,000 2,979,870 2,979,870
Develepment Authority, Hospital
Facilities Revenue, Anderson Area
Medical Center, 5.500%, 02/01/2011
South Carolina Jobs-Economic 3,420,000 3,420,000 3,473,728 3,473,728
Development Authority, Franciscan
Sisters of the Poor Health System
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inc., St. Francis Hospital, 6.375%,
7/1/2004
Sumter County, SC, Hospital Facility 485,000 485,000 485,553 485,553
Revenue Refunding, Toumey Medical
Center,, Prerefunded, 6.375%,
11/15/1999
Sumter County, SC, Hospital Facility 515,000 515,000 515,551 515,551
Revenue Refunding, Tuomey Medical
Center, Unrefunded Balance, 6.375%,
11/15/1999
TENNESSEE
Johnson City, TN, Health and 2,270,000 2,270,000 2,237,675 2,237,675
Educational, Refunding Bond, Medical
Center Hospital, 5.500%, 07/01/2013
Nashville and Davidson Counties, TN, 3,310,000 3,310,000 3,196,831 3,196,831
Water and Sewer Revenue, 5.250%,
1/1/2013
TEXAS
Austin, TX, Combined Utility System 6,775,000 6,775,000 3,936,201 3,936,201
Revenue, Zero Coupon, 11/15/2009
Austin, TX, Independent School 1,000,000 1,000,000 1,065,290 1,065,290
District, Guaranteed General
Obligation, 8.125%, 08/01/2001
Austin, TX, Utility System Revenue, 365,000 365,000 379,932 379,932
Series A, 6.300%, 11/15/2001
Austin, TX, Utility System Revenue, 635,000 635,000 659,943 659,943
Series A, 6.300%, 11/15/2001
Brownsville, TX, Utility System 1,000,000 1,000,000 1,057,480 1,057,480
Revenue Refunding, Series 1995,
6.000%, 09/01/2008
Brownsville, TX, Utility System 2,700,000 2,700,000 2,853,846 2,853,846
Revenue Refunding, Series 1995,
6.000%, 09/01/2009
Denison, TX, Hospital Authority, 1,000,000 1,000,000 927,100 927,100
Revenue Bond, Texoma Medical Center
Inc. Project, 6.125%, 08/15/2012
Ector County, TX, Hospital District 1,000,000 1,000,000 1,022,060 1,022,060
Revenue, Series 1997, 5.500%,
4/15/2003
Harris County, TX, Toll Road 3,915,000 3,915,000 2,760,349 2,760,349
Authority, Toll Road Revenue,
Subordinate Lien, Series A, Zero
Coupon, 08/15/2006
Harris County, TX, Toll Road 1,050,000 1,050,000 697,893 697,893
Authority, Toll Road Revenue,
Subordinate Lien, Series A, Zero
Coupon, 08/15/2007
Lower Colorado River Authority, TX, 1,320,000 1,320,000 1,346,096 1,346,096
5.500%, 05/15/2008
Lower Colorado River Authority, TX, 1,000,000 1,000,000 1,057,030 1,057,030
6.000%, 05/15/2007
Richardson, TX, Hospital Authority, 665,000 340,000 1,005,000 718,991 367,605 1,086,596
Prerefunded, Richardson Medical
Center, 6.500%, 12/01/2012
Richardson, TX, Hospital Authority, 1,065,000 535,000 1,600,000 1,055,309 530,132 1,585,441
Unrefunded Balance, Richardson Medical
Center, 6.500%, 12/01/2012
San Antonio, TX, Electric & Gas 5,000,000 5,000,000 4,916,250 4,916,250
Revenue Bond, Refunded, Series A,
5.250%, 02/01/2011
Texas Department of Housing & 785,000 785,000 793,203 793,203
Community Affairs, Single-Family
Mortgage Revenue, Series B, 5.500%,
3/1/2011
Texas Municipal Power Agency, Zero 8,385,000 8,385,000 5,560,177 5,560,177
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Coupon, 09/01/2007
Texas Public Finance Authority, 5,860,000 5,860,000 3,552,918 3,552,918
Building Revenue Refunding, Zero
Coupon, 02/01/2009
Travis County, TX, Health Services, 5,000,000 5,000,000 5,189,700 5,189,700
Series 1999a, 6.250%, 11/15/2013
Travis County, TX, Health Servies, 2,000,000 2,000,000 2,075,500 2,075,500
5.750%, 11/15/2007
UTAH
Intermountain Power Agency, UT, Power 10,495,000 10,495,000 9,740,724 9,740,724
Supply Revenue, Series B, Zero Coupon,
7/1/2001
Intermountain Power Agency, UT, Power 2,500,000 2,500,000 2,206,975 2,206,975
Supply Revenue, Series B, Zero Coupon,
7/1/2002
Intermountain Power Agency, UT, Power 8,000,000 8,000,000 8,570,080 8,570,080
Supply Revenue, Series B, 6.250%,
7/1/2006
Salt Lake County, UT, Water 3,200,000 3,200,000 2,651,680 2,651,680
Conservation District, Series A, Zero
Coupon, 10/01/2003
VIRGIN ISLANDS
Virgin Islands, Revenue Bonds, Public 3,000,000 1,000,000 4,000,000 3,026,970 1,008,990 4,035,960
Finance Authority, 5.500%, 10/01/2005
Virgin Islands, Water and Public 2,000,000 2,000,000 1,953,200 1,953,200
Finance Authority, 5.250%, 07/01/2009
Virgin Islands, General Obligation, 1,035,000 1,035,000 1,064,580 1,064,580
Public Finance Authority Revenue,
Matching Fund Loan Notes, Series A,
6.800%, 10/01/2000
WASHINGTON
Clark County, WA, School District, 1,820,000 1,820,000 1,734,132 1,734,132
General Obligation, 5.000%, 12/01/2011
Clark County, WA, Public Utility 12,150,000 12,150,000 12,798,932 12,798,932
District #1, Generating System Revenue
Bonds, 6.000%, 01/01/2007
King County, WA, Public Hospital 1,940,000 1,940,000 2,035,332 2,035,332
District, Hospital Facility, Revenue
Refunding Bond, Valley Medical Center,
6.000%, 09/01/2009
Lewis County, WA, Public Utility 1,430,000 1,430,000 1,528,713 1,528,713
District 1, Cowlitz Falls
Hydroelectric Project, Series 1991,
Prerefunded 10/1/2001, 7.000%,
10/1/2022
Snohomish County, WA, Public Utility 2,000,000 2,000,000 2,008,240 2,008,240
District #1, 1991 Series B, 6.400%,
1/1/2000
Thurston County, WA ,School District, 4,000,000 4,000,000 2,172,800 2,172,800
General Obligation, Series B,
12/1/2010
Washington Public Power Supply System, 8,000,000 8,000,000 6,342,880 6,342,880
Nuclear Project #3, Refunding Revenue,
Series B, Zero Coupon, 07/01/2004
Washington Public Power Supply System, 1,300,000 1,300,000 1,327,898 1,327,898
Nuclear Project #2, Refunding Revenue,
Series C, 7.300%, 07/01/2000
Washington Public Power Supply System, 4,330,000 4,330,000 4,308,567 4,308,567
Nuclear Project #2, Refunding Revenue,
Series A, 4.900%, 07/01/2005
Washington Public Power Supply System, 3,000,000 3,000,000 2,989,440 2,989,440
Nuclear Project #2, Refunding Revenue,
Series A, 5.250%, 07/01/2008
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Washington Public Power Supply System, 2,120,000 2,120,000 2,199,458 2,199,458
Nuclear Project #2, Refunding Revenue,
Series A, 5.800%, 07/01/2007
Washington Public Power Supply System, 1,550,000 1,550,000 1,592,300 1,592,300
Nuclear Project #2, Refunding Revenue,
Series 1992A, 5.700%, 07/01/2002
Washington Public Power Supply System, 2,950,000 2,950,000 3,107,294 3,107,294
Nuclear Project #1, Revenue Refunding
Bond, 6.000%, 07/01/2005
Washington Public Power Supply System, 6,000,000 1,000,000 7,000,000 6,180,060 1,030,010 7,210,070
Nuclear Project #2, Refunding Revenue,
Series A, 6.300%, 07/01/2001
Washington Public Power Supply System, 1,310,000 1,310,000 1,341,885 1,341,885
Nuclear Project #3, Refunding Revenue,
Series B, 7.150%, 07/01/2001
Washington Public Power Supply System, 5,275,000 5,275,000 5,346,846 5,346,846
Nuclear Project #1, Refunding Revenue,
Series B, 5.150%, 07/01/2002
Washington Public Power Supply System, 6,085,000 6,085,000 6,167,878 6,167,878
Nuclear Project #2, Refunding Revenue,
Series B, 5.150%, 07/01/2002
Washington Public Power Supply System, 3,165,000 3,165,000 3,208,107 3,208,107
Nuclear Project #3, Refunding Revenue,
Series B, 5.150%, 07/01/2002
Washington Public Power Supply System, 3,000,000 3,000,000 3,050,820 3,050,820
Nuclear Project #3, Refunding Revenue,
Series B, 5.250%, 07/01/2003
Washington State, Higher Education 1,500,000 1,500,000 1,414,605 1,414,605
Facilities Revenue Bond, 4.950%,
4/1/2011
WEST VIRGINIA
South Charleston, WV, Pollution 2,000,000 2,000,000 2,209,900 2,209,900
Control Revenue, Union Carbide,
7.625%, 08/01/2005
Wayne County, WV, Industrial 495,000 495,000 567,399 567,399
Development, Atlantic Richfield
Company Project, 11.750%, 12/01/2001
WISCONSIN
Milwaukee, WI, Metropolitan Sewer 1,000,000 1,000,000 1,045,470 1,045,470
District Revenue, Series A, 6.700%,
10/1/2001
Milwaukee County, WI, General 3,500,000 3,500,000 1,901,200 1,901,200
Obligation, Capital Aprreciation,
Series A, 12/01/2010
Wisconsin Health & Education 1,000,000 1,000,000 1,033,210 1,033,210
Facilities Authority, Columbia
Hospital Inc., 6.125%, 11/15/2001
Wisconsin Health and Education 1,745,000 1,745,000 1,816,824 1,816,824
Facilities Authority, St. Luke's
Medical Center, 6.600%, 08/15/2001
Wisconsin Health & Educational 1,675,000 1,675,000 1,742,938 1,742,938
Facilities Authority, Wheaton
Franciscan Services, 5.800%,
8/15/2004
Wisconsin Health & Educational 1,400,000 1,400,000 1,470,266 1,470,266
Facilities Authority, Mercy Health
System Corporation, 6.000%, 08/15/2005
Wisconsin Health & Educational 1,000,000 1,000,000 1,036,510 1,036,510
Facilities Authority, Wheaton
Franciscan Hospital, 6.000%,
8/15/2002
Wisconsin Health & Educational 1,480,000 1,480,000 1,566,062 1,566,062
Facilities Authority, Mercy Health
System Corporation, 6.125%, 08/15/2006
Wisconsin Health & Educational 1,000,000 1,000,000 1,066,490 1,066,490
<PAGE>
<CAPTION>
Medium Term Limited Term Pro Forma Medium Term Limited Term Pro Forma
Tax-Free Tax Free Combined Market Market Value Combined
Principal Principal Principal Value($) ($) Market
Amount ($) Amount($) Amount($) Value($)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Facilities Authority, Mercy Health
System Corporation, 6.250%, 08/15/2007
============================================
LONG-TERM MUNICIPAL INVESTMENTS TOTAL 572,351,809 81,657,757 654,009,566
============================================
LONG-TERM MUNICIPAL INVESTMENTS (COST OF
$560,466,273 $80,209,188 AND $640,675,461
RESPECTIVELY)
============================================
TOTAL INVESTMENT PORTFOLIO- 100% 580,151,809 91,557,757 671,709,566
============================================
INVESTMENT PORTFOLIO (TOTAL COST OF $568,266,273
$90,109,188 AND $658,375,461 RESPECTIVELY)
</TABLE>
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA COMBINING CONDENSED STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
MEDIUM TERM LIMITED PRO FORMA PRO FORMA
TAX FREE FUND TERM TAX FREE ADJUSTMENTS COMBINED
--------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Investments, at value $ 580,151,809 $ 91,557,757 $ 671,709,566
Cash 2,048,607 231,517 2,280,124
Other assets less liabilities 4,814,044 (3,807,154) $ (32,698) (2) 974,192
--------------------- -------------------- ------------------- --------------------
Net assets $ 587,014,460 $ 87,982,120 $ (32,698) $ 674,963,882
===================== ==================== =================== ====================
Shares outstanding 53,956,645 7,421,852 663,724 62,042,221
Net asset value per share $ 10.88 $ 11.85 $ 10.88
</TABLE>
<PAGE>
PRO FORMA COMBINING CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTH PERIOD ENDED OCTOBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
MEDIUM TERM LIMITED PRO FORMA PRO FORMA
TAX FREE FUND TERM TAX FREE ADJUSTMENTS COMBINED
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income $ 34,073,182 5,446,070 $ -- $ 39,519,252
-----------------------------------------------------------------------------
Total Investment Income 34,073,182 5,446,070 39,519,252
Expenses
Management fees 3,734,139 673,611 (112,263) (3) 4,295,487
48,856 15,277 (15,277) (4) 48,856
All other expenses 832,310 326,986 (20,650) (5) 1,138,646
-----------------------------------------------------------------------------
Total expenses before reductions 4,615,305 1,015,874 (148,190) 5,482,989
Expense reductions - (173,750) 173,750 (6) -
-----------------------------------------------------------------------------
Expenses, net 4,615,305 842,124 25,560 5,482,989
-----------------------------------------------------------------------------
Net investment income (loss) 29,457,877 4,603,946 (25,560) 34,036,263
-----------------------------------------------------------------------------
Net Realized and Unrealized Gain (loss)
on Investments:
Net realized gain (loss) from investments (1,330,325) 135,407 -- (1,194,918)
Net unrealized appreciation (depreciation)
of investments (33,937,207) (3,724,036) -- (37,661,243)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets from operations $ (5,809,655) $ 1,015,317 $ (25,560) $ (4,819,898)
=============================================================================
</TABLE>
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 1999
1. These financial statements set forth the unaudited pro forma condensed
Statement of Assets and Liabilities as of October 31, 1999, and the
unaudited pro forma condensed Statement of Operations for the twelve month
period ended October 31, 1999 for Scudder Medium Term Tax Free Fund and
Scudder Limited Term Tax Free Fund as adjusted giving effect to the
Reorganization as if it had occurred as of the beginning of the period.
These statements have been derived from the books and records utilized in
calculating daily net asset value for each fund.
2. Represents one-time proxy, legal, accounting and other costs of the
Reorganization of $21,642 and $11,056 to be borne by the Acquiring Fund and
the Acquired Fund, respectively.
<PAGE>
3. Represents reduction in management fees resulting from the application of
Scudder Medium Term Tax Free Fund's lower management fee.
4. Reduction in trustee fees resulting from the Reorganization.
5. Represents reduction in other expenses resulting from the implementation of
an administrative fee contract.
6. Represents the elimination of expense reimbursements.
