Filed electronically with the Securities and Exchange Commission
on December 1, 2000
File No. 2-81549
File No. 811-3657
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 / /
Pre-Effective Amendment No.
-- / /
Post-Effective Amendment No. 33
-- / X /
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 33
---- / X /
Kemper State Tax-Free Income Series.
-----------------------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
--------------
Philip J. Collora
-----------------
Vice President and Secretary
----------------------------
Kemper State Tax-Free Income Series
-----------------------------------
222 South Riverside Plaza
-------------------------
Chicago, Illinois 60606
-----------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<S> <C>
/ / Immediately upon filing pursuant to paragraph ( b ) / / days after filing pursuant to paragraph ( a ) ( 1 )
/ / days after filing pursuant to paragraph ( a ) ( 2 ) / / On (date)pursuant to paragraph ( b )
/ X / On February 1, 2001 pursuant to paragraph ( a ) ( 1 ) / / On ( date ) pursuant to paragraph ( a ) ( 3 ) of Rule 485
</TABLE>
If Appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
KEMPER STATE TAX -FREE INCOME SERIES
Kemper California Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
2
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD (SM)
February 1, 2001
Prospectus
KEMPER CALIFORNIA TAX-FREE INCOME FUND
Class S
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
HOW THE INVESTING IN
FUND WORKS THE FUND
2 Kemper California 11 How To Buy, Sell or Exchange
Tax-Free Income Fund Shares
9 Other Policies And Risks 13 Policies You Should
Know About
10 Financial Highlights
17 Understanding
Distributions And Taxes
<PAGE>
How The Fund Works
This fund invests mainly in municipal bonds, and seeks income that is free from
regular federal income tax as well as state and local income tax for investors
in that state.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency and you could
lose money by investing in them.
<PAGE>
TICKER SYMBOLS CLASS S
Kemper
California Tax-Free
Income Fund
FUND GOAL The fund seeks a high level of current income that is exempt
from California state and federal income taxes.
2
<PAGE>
--------------------------------------------------------------------------------
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in California municipal
securities and other securities whose income is free from regular federal income
tax.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making their buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements to
specific security characteristics and changes in supply and demand within the
municipal bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments.
---[ICON]-----------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
The fund could put up to 25% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and risk of
default.
3
<PAGE>
--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, California residents' high
sensitivity to taxes could make it hard to raise taxes in order to meet
obligations.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality or other matters
o derivatives could produce disproportionate losses
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund may suit California taxpayers who are in a moderate to high tax
bracket and are seeking a long-term income investment that generates tax-free
income.
--------------------------------------------------------------------------------
4
<PAGE>
--------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
11.42 8.25 12.59 -5.47 19.48 2.98 8.59 6.02 6.70
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
--------------------------------------------------------------------------------
Best quarter: ____%, Q_ 19__ YTD return as of ___: ___%
Worst quarter: ____%, Q_ 19__
------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/2000)
------------------------------------------------------------------------------
Since
Since Since Since --
-- -- -- Life of
1 Year 5 Years 10 Years Class A
------------------------------------------------------------------------------
Fund -- Class A
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
------------------------------------------------------------------------------
Class S does not have a full calendar year of performance and past performance
data is not provided. Although Class A shares are not offered in this
prospectus, they are invested in the same portfolio. Class S shares' annual
returns differ only to the extent that the classes have different fees and
expenses.
5
<PAGE>
--------------------------------------------------------------------------------
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
--------------------------------------------------------------------------------
Fee Table Class S
--------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment None
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class S shares $ $ $
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class S shares $ $ $
------------------------------------------------------------------------------
6
<PAGE>
--------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets
under management.
At times, market conditions might make it hard to value some investments or to
get an attractive price for them.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee.
For the most recent fiscal year, the actual amount the fund paid in management
fees was --% of its average daily net assets.
7
<PAGE>
---[ICON]-----------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Philip G. Condon Matthew J. Caggiano
Co-Lead Portfolio o Began investment
Manager career in 1989
o Began investment career o Joined the advisor
in 1976 in 1991
o Joined the advisor o Joined the fund team
in 1983 in 1999
o Joined the fund team
in 1999
Eleanor R. Brennan
Co-Lead Portfolio
Manager
o Began investment career
in 1990
o Joined the advisor
in 1995
o Joined the fund team
in 1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
--------------------------------------------------------------------------------
8
<PAGE>
--------------------------------------------------------------------------------
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could change
the fund's investment goal without seeking shareholder approval. However,
the policy of investing at least 80% of net assets in municipal securities
for each fund cannot be changed without shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as U.S. or Canadian securities money market
securities. This could prevent losses, but would mean that the fund was not
pursuing its goal.
o The fund may trade securities actively. This could raise transaction costs
(thus lowering performance) and could mean higher taxable distributions.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality changes, the security will usually
be sold unless the adviser believes this would not be in the shareholders'
best interests.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
9
<PAGE>
Financial Highlights
This table is designed to help you understand the fund's financial performance
in recent years. The figures in the first part of each table are for a single
share. The total return figures represent the percentage that an investor in the
fund would have earned (or lost), assuming all dividends and distributions were
reinvested. This information has been audited by Ernst & Young LLP whose report,
along with the fund's financial statements, is included in the annual report
(see "Shareholder reports" on the back cover).
{INSERT TABLE}
10
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
--------------------------------------------------------------------------------
Class S First investment Additional investments
--------------------------------------------------------------------------------
$2,500 or more for $100 or more for regular
regular accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address,
along with an o account number
investment check
o check payable to "The Scudder
Funds"
--------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
--------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
--------------------------------------------------------------------------------
With an automatic o Fill in the o To set up regular investments
investment plan information on your from a bank checking account,
application and include call 1-800-SCUDDER
a voided check
--------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
--------------------------------------------------------------------------------
On the Internet o Go to "funds and o Call 1-800-SCUDDER to ensure
prices" at you have electronic services
www.scudderdirect.com
o Register at www.scudder.com
o Print out a prospectus
and a new account o Follow the instructions for
application buying shares with money from
your bank account
o Complete and return
the application with
your check
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
11
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
--------------------------------------------------------------------------------
Exchanging into another
Class S fund Selling Shares
--------------------------------------------------------------------------------
$2,500 or more to open a Some transactions, including
new account ($1,000 or most for over $100,000, can
more for IRAs) only be ordered in writing; if
you're in doubt, see page 15
$100 or more for
exchanges between
existing accounts
--------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
--------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 o Call 1-800-343-2890 and
and follow the follow the instructions
instructions
--------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and o the fund, class and account
account number you're number from which you want to
exchanging out of sell shares
o the dollar amount or o the dollar amount or number
number of shares you of shares you want to sell
want to exchange
o your name(s), signature(s)
o the name and class of and address, as they appear on
the fund you want to your account
exchange into
o a daytime telephone number
o your name(s),
signature(s), and
address, as they appear
on your account
o a daytime telephone
number
--------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
--------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
--------------------------------------------------------------------------------
On the Internet o Register at --
www.scudder.com
o Follow the
instructions for making
on-line exchanges
--------------------------------------------------------------------------------
12
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m.
and 8 p.m. Eastern time on any fund business day by calling
1-800-SCUDDER.
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class S shares. The fund does have other share classes, which
are described in separate prospectuses and which have different fees,
requirements, and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-SCUDDER.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by ___, and they have determined that it is a "good order," it will be
processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to ___
before they can be processed, you'll need to allow extra time. A representative
of your investment provider should be able to tell you when your order will be
processed.
13
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or
even place orders for exchanges, go to www.scudder.com.
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject purchase orders, for
these or other reasons.
14
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the fund calculates share price
For each share class, the price at which you buy shares is the net asset value
per share, or NAV. To calculate NAV, each share class of the fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
15
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o charge you $9 each calendar quarter if your account balance is below $1,000
for the entire quarter; this policy doesn't apply to most retirement
accounts or if you have an automatic investment plan
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
16
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders annually
in November or December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
17
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
-------------------------------------------------------------------
o short-term capital gains from selling fund shares
-------------------------------------------------------------------
o taxable income dividends you receive from the fund
-------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
-------------------------------------------------------------------
Generally taxed at capital gains rates
-------------------------------------------------------------------
o long-term capital gains from selling fund shares
-------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
-------------------------------------------------------------------
You may be able to claim a tax credit or deduction for your share of any foreign
taxes the fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
18
<PAGE>
--------------------------------------------------------------------------------
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we may mail one copy per
household. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC.
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (800) SEC-0330
Kemper Funds
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
SEC File Number
Kemper California Tax-Free Income Fund 811-3657
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[LOGO] KEMPER FUNDS
Long-term investing in a short-term world(SM)
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD(SM)
February 1, 2001
Prospectus
KEMPER NEW YORK TAX-FREE INCOME FUND
Class S
As with all mutual funds, the Securities and
Exchange Commission (SEC) does not approve
or disapprove these shares or determine
whether the information in this prospectus
is truthful or complete. It is a criminal
offense for anyone to inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
HOW THE INVESTING IN
FUND WORKS THE FUND
2 Kemper New York Tax-Free 10 How To Buy, Sell and
Income Fund Exchange Class S Shares
8 Other Policies And Risks 12 Policies You Should
Know About
9 Financial Highlights
16 Understanding
Distributions And Taxes
<PAGE>
How The Fund Works
This fund invests mainly in municipal bonds. and seeks income that is free from
regular federal income tax as well as state and local income tax for investors
in that state.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency and you could
lose money by investing in them.
<PAGE>
Kemper New York Tax-Free Income Fund
TICKER SYMBOLS CLASS S
Kemper
New York Tax-Free
Income Fund
--------------------------------------------------------------------------------
FUND GOAL The fund seeks a high level of current income that is exempt
from New York state and New York City income taxes and federal income taxes.
2
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of net assets in New York municipal securities and other
securities that are exempt from New York state and New York City income taxes.
The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making their buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements to
specific security characteristics and changes in supply and demand within the
municipal bond market.
Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.
[ICON]
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.
Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
3
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.
A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, a downturn in the financial
industry could bring on a fiscal crisis in New York City, which has experienced
such crises before.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality or other matters
o derivatives could produce disproportionate losses
o securities that rely on third-party insurers to raise their credit
quality could fall in price or go into default if the financial
condition of the insurer deteriorates
o political or legal actions could change the way the fund's dividends
are taxed
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
4
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1991 13.39
1992 9.43
1993 12.95
1994 -4.95
1995 17.98
1996 2.54
1997 8.89
1998 6.00
1999 0.0
2000 0.0
Best quarter: ____%, Q_ 19__ YTD return as of ___: ___%
Worst quarter: ____%, Q_ 19__
Average Annual Total Returns (as of 12/31/2000)
--------------------------------------------------------------------------------
Since
Since Since Since --
-- -- -- Life of
1 Year 5 Years 10 Years Class A
--------------------------------------------------------------------------------
Fund -- Class A
--------------------------------------------------------------------------------
Index
--------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
--------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, returns for 1991 would have been lower if operating expenses hadn't been
reduced.
Class S does not have a full calendar year of performance and past performance
data is not provided. Although Class A shares are not offered in this
prospectus, they are invested in the same portfolio. Class S shares' annual
returns differ only to the extent that the classes have different fees and
expenses.
5
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
--------------------------------------------------------------------------------
Fee Table Class S
--------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment None
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee
--------------------------------------------------------------------------------
Distribution (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class S shares $ $ $
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class S shares $ $ $
------------------------------------------------------------------------------
6
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
At times, market conditions might make it hard to value some investments or to
get an attractive price for them.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee.
For the most recent fiscal year, the actual amount the fund paid in management
fees was --% of its average daily net assets.
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day
management:
Ashton P. Goodfield Philip G. Condon
Co-Lead Portfolio Manager Co-Lead Portfolio Manager
o Began investment career o Began investment career
in 1986 in 1976
o Joined the advisor in 1986 o Joined the advisor
o Joined the fund team in 1983
in 1999 o Joined the fund team
in 1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
However, the policy of investing at least 80% of net assets in
municipal securities for each fund cannot be changed without
shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of
its assets into investments such as U.S. or Canadian securities money
market securities. This could prevent losses, but would mean that the
fund was not pursuing its goal.
o The fund may trade securities actively. This could raise transaction
costs (thus lowering performance) and could mean higher taxable
distributions.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality changes, the security will
usually be sold unless the adviser believes this would not be in the
shareholders' best interests.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Financial Highlights
This table is designed to help you understand the fund's financial performance
in recent years. The figures in the first part of each table are for a single
share. The total return figures represent the percentage that an investor in the
fund would have earned (or lost), assuming all dividends and distributions were
reinvested. This information has been audited by Ernst & Young LLP whose report,
along with the fund's financial statements, is included in the annual report
(see "Shareholder reports" on the back cover).
[INSERT TABLE]
9
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
------------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address, along
with an investment check o account number
o check payable to "The Scudder
Funds"
------------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include from a bank checking account,
a voided check call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudderdirect.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application
o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
--------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
you're in doubt, see page 14
$100 or more for exchanges
between existing accounts
---------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
---------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
---------------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and account o the fund, class and account
number you're exchanging number from which you want to
out of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s)
fund you want to exchange into and address, as they appear
on your account
o your name(s), signature(s),
and address, as they appear o a daytime telephone number
on your account
o a daytime telephone number
---------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
---------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
---------------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
---------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8
a.m. and 8 p.m. Eastern time on any fund business day by calling
1-800-SCUDDER.
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class S shares. The fund does have other share classes, which
are described in separate prospectuses and which have different fees,
requirements, and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-SCUDDER.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by ___, and they have determined that it is a "good order," it will be
processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to ___
before they can be processed, you'll need to allow extra time. A representative
of your investment provider should be able to tell you when your order will be
processed.
12
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders
with Internet access. To get up-to-date information, review
balances or even place orders for exchanges, go to
www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject purchase orders, for
these or other reasons.
13
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax,
you can always send us your order in writing.
--------------------------------------------------------------------------------
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the fund calculates share price
For each share class, the price at which you buy shares is the net asset value
per share, or NAV. To calculate NAV, each share class of the fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
-------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
14
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
15
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always
a good idea to ask your tax professional about the tax
consequences of your investments, including any state and local
tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders annually
in November or December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
16
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from the fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------------
You may be able to claim a tax credit or deduction for your share of any foreign
taxes the fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
17
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we may mail one copy per
household. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC.
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (800) SEC-0330
Kemper Funds
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
--------------------------------------------------------------------------------
SEC File Number
Kemper New York Tax-Free Income Fund 811-3657
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[LOGO] KEMPER FUNDS
Long-term investing in a short-term world(SM)
<PAGE>
KEMPER TAX-FREE INCOME FUNDS
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2001
Kemper State Tax-Free Income Series ("State Trust"):
----------------------------------------------------
Kemper California Tax-Free Income Fund ("California Fund")
Kemper New York Tax-Free Income Fund ("New York Fund")
(collectively the "State Funds")
Class S shares
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for the Class S shares of the Funds. It
should be read in conjunction with the combined prospectus dated February 1,
2001. The prospectus may be obtained without charge by writing to Kemper
Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606-5808 or calling
1-800-621-1048.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS..............................................2
INVESTMENTS..........................................................4
INVESTMENT POLICIES AND TECHNIQUES..................................19
DIVIDENDS AND TAXES.................................................26
PERFORMANCE.........................................................29
INVESTMENT MANAGER AND UNDERWRITER..................................33
BROKERAGE COMMISSIONS...............................................36
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES.......................37
PURCHASE OF SHARES..................................................37
REDEMPTION OR REPURCHASE OF SHARES..................................38
OFFICERS AND TRUSTEES...............................................42
Capital Structure...................................................47
APPENDIX -- RATINGS OF INVESTMENTS..................................49
The financial statements appearing in the Funds' August 31 2000 Annual Reports
to Shareholders are incorporated herein by reference. The financial statements
for the Funds for which this Statement of Additional Information is requested
accompany this document and may also be obtained by calling 1-800-621-1048.
<PAGE>
Kemper California Tax-Free Income Fund ("California Fund")
Kemper New York Tax-Free Income Fund ("New York Fund")
(collectively the "State Funds")
Class S shares
The Funds offer multiple classes of shares. Class S is offered in this Statement
of Additional Information. Each class has its own important features and
policies. The Funds also have three other share classes offered in a separate
prospectus and Statement of Additional Information.
INVESTMENT RESTRICTIONS
Certain fundamental investment restrictions have been adopted for each Fund
which cannot be changed for a Fund without approval of a majority of its
outstanding voting shares. As defined in the Investment Company Act of 1940, as
amended, (the "1940 Act") this means the lesser of the vote of (a) 67% of the
shares of the Fund present at a meeting where more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of the outstanding
shares of the Fund.
Each Fund has elected to be classified as non-diversified series of an open-end
investment company.
Each Fund may not, as a fundamental policy:
1. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time.
2. Make loans except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction from time to time
3. Borrow money, except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time.
4. Purchase physical commodities or contracts relating to physical
commodities.
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of a Fund's
ownership of securities.
6. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.
7. Issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. In the event
a Fund acquires illiquid assets as a result of the exercise of a security
interest relating to municipal securities, the Fund will dispose of such assets
as promptly as possible. Although no Fund has the current intention to do so, a
Fund may invest more than 25% of its net assets in industrial development bonds.
For purposes of diversification, identification of the issuer of a municipal
security depends on the terms and conditions of the obligation. Each Fund
considers the issuer to be the party with the primary financial obligation for
the issue. The Funds did not borrow money as permitted by the investment
restrictions in the latest fiscal year. Neither of the Funds have any present
intention of borrowing during the current year.
Each Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board of Trustees without shareholder approval. Each Fund may
not:
1. Invest for the purpose of exercising control or management of another
issuer.
2
<PAGE>
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
3. Invest more than 15% of its net assets in illiquid securities.
4. Purchase options, unless the aggregate premiums paid on all such options
held by a Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50 of its total assets.
5. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of a Fund and the premiums
paid for such options on futures contracts does not exceed 5% of the fair
market value of a Fund's total assets; provided that in the case of an
option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
The California Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. This
Fund may not:
1. Make short sales of securities or purchase any securities on margin, except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
2. Pledge its securities or receivables or transfer or assign or otherwise
encumber them in an amount exceeding the amount of the borrowing secured
thereby.
3. Write, purchase or sell puts, calls or combinations thereof, except in
accordance with its investment objective and policies.
4. Purchase securities or make investments other than in accordance with its
investment objective and policies, except that all or substantially all of
the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.
The New York Fund has adopted the following non-fundamental restrictions, which
may be changed by the Board of Trustees without shareholder approval. This Funds
may not:
1. Make short sales of securities, or purchase any securities on margin,
except to obtain such short-term credit as may be necessary for the
clearance of transactions; however, it may make margin deposits in
connection with financial futures and options transactions.
2. Pledge its securities or receivables or transfer or assign or otherwise
encumber them in an amount to exceed 10% of its net assets to secure
borrowings.
3. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
4. Make investments other than in accordance with its investment objective and
policies, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund.
Interfund Borrowing and Lending Program. The Trust's Board of Trustees has
approved the filing of an application for exemptive relief with the SEC which
would permit the Funds to participate in an interfund lending program among
certain investment companies advised by the Adviser. If the Funds receive the
requested relief, the interfund lending program would allow the participating
funds to borrow money from and loan money to each other for temporary or
emergency purposes. The program would be subject to a number of conditions
designed to ensure fair and equitable treatment of all participating funds,
including the following: (1) no fund may borrow money through the program unless
it receives a more favorable interest rate than a rate approximating the lowest
interest rate at which bank loans would be available to any of the participating
funds under a loan agreement; and (2) no fund may lend money through the program
unless it receives a more favorable return than that available from an
investment in repurchase agreements and, to the extent applicable, money market
cash sweep arrangements. In addition, a fund would participate in the program
only if and to the extent that such participation is consistent with the fund's
investment objectives and policies (for instance, money market funds would
normally participate
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only as lenders and tax exempt funds only as borrowers). Interfund loans and
borrowings would extend overnight, but could have a maximum duration of seven
days. Loans could be called on one day's notice. A fund may have to borrow from
a bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost investment
opportunity or additional costs. The program is subject to the oversight and
periodic review of the Boards of the participating funds. To the extent the
Funds are actually engaged in borrowing through the interfund lending program,
the Funds, as a matter of non-fundamental policy, may not borrow for other than
temporary or emergency purposes (and not for leveraging).
Master/feeder fund structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Funds while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENTS
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. The net asset value of the Fund's shares will increase or
decrease with changes in the market price of the Fund's investments, and there
can be no assurance that the Fund's objective will be met.
The Fund is an open-end management investment company which continuously offers
and redeems shares at net asset value. The Fund is a company of the type
commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Fund may engage (such as hedging,
etc.) or a financial instrument which a Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing a Fund's portfolio
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for each Fund, but not for all funds advised by it.
Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund, but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
MUNICIPAL SECURITIES. Each of the Funds invests principally in "Municipal
Securities," which are debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Securities may be issued include:
o to refund outstanding obligations
o to obtain funds for general operating expenses
o to obtain funds to loan to other public institutions and facilities.
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The two general classifications of Municipal Securities are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Revenue bomds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source.
The yields on Municipal Securities are dependent on a variety of factors,
including general money market conditions, general conditions of the Municipal
Securities market, size of a particular offering, the maturity of the obligation
and rating of the issue. The ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch IBCA, Inc. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff") represent their opinions as to the
quality of the Municipal Securities which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal Securities
of the same maturity and coupon with different ratings may have the same yield.
The Funds may invest in tax-exempt leases. A tax-exempt lease is an obligation,
often a lease purchase or installment contract, pursuant to which a governmental
user of a capital asset, such as an item of equipment, agrees to make payments
of the purchase price plus interest over a period of years, normally with the
right to purchase the asset at the termination of the lease for a nominal
amount. Tax-exempt leases normally have a term of only two to seven years, a
relatively short period of time, and often have a higher interest rate than
tax-exempt investments of a comparable term. Currently, it is anticipated that
not more than 5% of the net assets of a Fund will be invested in tax-exempt
leases during the coming year.
Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which litigation could ultimately
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
SPECIAL RISK FACTORS. The following information as to certain risk factors is
given to investors because each State Fund concentrates its investments in
Municipal Securities of a particular state. Such information constitutes only a
summary, does not purport to be a complete description and is based upon
information from official statements relating to securities offerings of state
issuers. Investors should remember that rating agencies do change ratings
periodically so that ratings mentioned here may have changed.
California Fund. As described in the California Fund's prospectus, the Fund will
invest in bonds issued by the State of California or its political subdivisions.
The Fund is therefore subject to various statutory, political and economic
factors unique to the State of California. Discussed below are some of the more
significant factors that could affect the ability of the bond issuers to repay
interest and principal on California securities owned by the Fund. The
information is derived from various public sources, all of which are available
to investors generally, and which the Fund believes to be accurate.The following
information constitutes only a brief summary, does not purport to be a complete
description, and is based on information available as of the date of this
Prospectus from official statements and prospectuses relating to securities
offerings of the State of California and various local agencies in California.
While the Sponsors have not independently verified such information, they have
no reason to believe that such information is not correct in all material
respects.
1995-96 through 1997-98 Fiscal Years
With the end of the recession of the early 1990's and a growing economy
beginning in 1994, the State's financial condition improved markedly through a
combination of increasing revenues, slowdown in growth of social welfare
programs, and continued spending restraint. The last of the recession-induced
budget deficits was repaid, allowing the State's Special Fund for Economic
Uncertainties (the "SFEU") to post a positive cash balance for only the second
time in the 1990's, totaling $281 million as of June 30, 1997. The State's cash
position also improved and no deficit borrowing occurred over the last four
fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (approximately $2.2
billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.0
billion in 1998-99) than were initially planned when the budgets were enacted.
These additional funds were largely directed to school spending
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as mandated by Proposition 98, and to make up shortfalls from reduced federal
health and welfare aid in 1995-96 and 1996-97. The accumulated budget deficit
from the recession years was eliminated.
1998-99 Fiscal Year Budget
The following were major features of the 1998 Budget Act and certain additional
fiscal bills enacted before the end of the legislative session:
The most significant feature of the 1998-99 budget was agreement on a total of
$1.4 billion of tax cuts. The central element was a bill which provided for a
phased-in reduction of the Vehicle License Fee ("VLF"). Since the VLF is
transferred to cities and counties under existing law, the bill provided for the
General Fund to replace the lost revenues. Starting on January 1, 1999, the VLF
was reduced by 25 percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both temporary and
permanent increases in the personal income tax dependent credit ($612 million
General Fund cost in 1998-99, and less in future years), a nonrefundable
renter's tax credit ($133 million), and various targeted business tax credits
($106 million).
Proposition 98 funding for K-14 schools was increased by $1.7 billion in General
Fund moneys over revised 1997-98 levels, approximately $300 million higher than
the minimum Proposition 98 guarantee. Of the 1998-99 funds, major new programs
included money for instructional and library materials, previously deferred
maintenance, support for increasing the school year to 180 days and reduction of
class sizes in Grade 9.
Funding for higher education increased substantially above the actual 1997-98
level. General Fund support was increased by $340 million (15.6 percent) for the
University of California and $267 million (14.1 percent) for the California
State University system. In addition, Community Colleges funding increased by
$300 million (6.6 percent).
The budget included increased funding for health, welfare and social services
programs. A 4.9 percent grant increase was included in the basic welfare grants,
the first increase in those grants in nine years.
Funding for the judiciary and criminal justice programs increased approximately
11 percent over 1997-98, primarily to reflect increased State support for local
trial courts and rising prison population.
Major legislation enacted after the 1998 Budget Act included new funding for
resources projects, a share of the purchase of the Headwaters Forest, funding
for the Infrastructure and Economic Development Bank ($50 million) and funding
for the construction of local jails. The State realized savings of $433 million
from a reduction in the State's contribution to the State Teacher's Retirement
System in 1998-99.
1999-2000 Fiscal Year Budget
On January 8, 1999, Governor Davis released his proposed budget for Fiscal Year
1999-2000 (the "January Governor's Budget"). The January Governor's Budget
generally reported that general fund revenues for FY 1998-99 and FY 1999-2000
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of general fund expenditures in FY 1999-2000, with a $415 million SFEU
reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for combined
fiscal years 1998-99 and 1999-2000. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of $63.0
billion, and contained expenditures totaling $63.7 billion after the Governor
used his line-item veto to reduce the legislative Budget Bill expenditures by
$581 million (both General Fund and Special Fund). The 1999 Budget Act also
contained expenditures of $16.1 billion from special funds and $1.5 billion from
bond funds. The Administration estimated that the SFEU would have a balance at
June 30, 2000, of about $880 million. Not included in this amount was an
additional $300 million which (after the Governor's vetoes) was "set aside" to
provide funds for employee salary increases (to be negotiated in bargaining with
employee unions), and for litigation reserves. The 1999 Budget Act anticipates
normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include the following:
Proposition 98 funding for K-12 schools was increased by $1.6 billion in General
Fund moneys over revised 1998-99 levels, $108.6 million higher than the minimum
Proposition 98 guarantee. Of the 1999-2000 funds, major new programs included
money for reading improvement, new textbooks, school safety, improving teacher
quality, funding teacher bonuses,
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providing greater accountability for school performance, increasing preschool
and after school care programs and funding deferred maintenance of school
facilities.
Funding for higher education increased substantially above the actual 1998-99
level. General Fund support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for the California State
University system. In addition, Community Colleges funding increased by $324.3
million (6.6 percent). As a result, undergraduate fees at the University of
California and the California State University System will be reduced for the
second consecutive year, and the per-unit charge at Community Colleges will be
reduced by $1.
The Budget included increased funding of nearly $600 million for health and
human services.
About $800 million from the General Fund will be directed toward infrastructure
costs, including $425 million in additional funding for the Infrastructure Bank,
initial planning costs for a new prison in the Central Valley, additional
equipment for train and ferry service, and payment of deferred maintenance for
state parks.
The Legislature enacted a one-year additional reduction of 10 percent of the VLF
for calendar year 2000, at a General Fund cost of about $250 million in each of
FY 1999-2000 and 2000-01 to make up lost funding to local governments.
Conversion of this one-time reduction to a permanent cut will remain subject to
the revenue tests in the legislation adopted last year.
A one-time appropriation of $150 million, to be split between cities and
counties, was made to offset property tax shifts during the early 1990's.
Additionally, an ongoing $50 million was appropriated as a subvention to cities
for jail booking or processing fees charged by counties when an individual
arrested by city personnel is taken to a county detention facility.
Constitutional, Legislative and Other Factors
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could produce the
adverse effects described below, among others.
Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's General Fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's General Fund will be distributed in the future to counties, cities and
their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the Portfolio may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
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These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before bringing
a personal action against the debtor. The fourth statutory provision limits any
deficiency judgment obtained by a creditor secured by real property following a
judicial sale of such property to the excess of the outstanding debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain Debt Obligations in the Portfolio may be obligations which finance the
acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original principal amount of the
mortgage loan in a 12-month period; a prepayment charge cannot in any event
exceed six months' advance interest on the amount prepaid during the 12-month
period in excess of 20% of the original principal amount of the loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
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Proposition 13. Certain of the Debt Obligations may be obligations of issuers
who rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem tax on
real property to 1% of full cash value to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under `full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article XIIIA
provides that notwithstanding any other law, local agencies may not levy any ad
valorem property tax except to pay debt service on indebtedness approved by the
voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as "Proposition 9" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
Proposition 98. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (modified
by Proposition 111 as discussed below), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both houses,
with the Governor's concurrence -- to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. During the
course of this litigation, a trial court determined that almost $2 billion in
"loans" which had been provided to school districts during the recession
violated the constitutional protection of support for public education. A
settlement was reached on April 12, 1996 which ensures that future school
funding will not be in jeopardy over repayment of these so-called loans.
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Proposition 111. On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July 1,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
Proposition 62. On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative provided the following:
Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
Requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction;
Restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed;
Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA;
Prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governments;
Requires that any tax imposed by a local government on or after August 1, 1985
be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
Requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and
Permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in City of Woodlake v. Logan, (1991) 230 Cal. App. 3d 1058, subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review both the City of Westminster and the City of Woodlake
decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28, 1995) 11
Cal. 4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal. 4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
In McBrearty v. City of Brawley, 59 Cal. App. 4th 1441, 69 Cal. Rptr. 2d 862
(Cal. Ct. App. 1997), the Court of Appeal held that the city of Brawley must
either hold an election or cease collection of utility taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance imposing
a utility tax on its residents and began collecting the tax without first
seeking voter approval. In 1996, the taxpayer petitioned for writ of mandate
contending that Proposition 62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of mandamus
and the city appealed.
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First, the Court of Appeal held that the taxpayer's cause of action accrued for
statute of limitation purposes at the time of the Guardino decision rather than
at the time when the city adopted the tax ordinance which was July 1991. Second,
the Court held that the voter approval requirement in Proposition 62 was not an
invalid mechanism under the state constitution for the involvement of the
electorate in the legislative process. Third, the Court rejected the city's
argument that Guardino should only be applied on a prospective basis. Finally,
the Court held Proposition 218 (see discussion below) did not impliedly protect
any local general taxes imposed prior January 1, 1995 against challenge.
Assembly Bill 1362 (Mazzoni), introduced February 28, 1997, which would have
made the Guardino decision inapplicable to any tax first imposed or increased by
an ordinance or resolution adopted before December 14, 1995, was vetoed by the
Governor on October 11, 1997. The California State Senate had passed the Bill on
May 16, 1996 and the California State Assembly had passed the bill on September
11, 1997. It is not clear whether the Bill, if enacted, would have been
constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
Proposition 218. On November 5, 1996, the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what extent
Proposition 218 may be held to be constitutional or how its terms will be
interpreted and applied by the courts. However, if upheld, Proposition 218 could
substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate fees
and assessments, notify the public and defend local government fees and
assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for the
imposition, extension or increase of general taxes and two-thirds voter approval
for the imposition, extension or increase of special taxes, including special
taxes deposited into a local government's general fund. Proposition 218 also
provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the initiative power to
give voters the power to reduce or repeal local taxes, assessments, fees and
charges, regardless of the date such taxes, assessments, fees or charges were
imposed. This extension of the initiative power to some extent
constitutionalizes the March 6, 1995 State Supreme Court decision in Rossi v.
Brown, which upheld an initiative that repealed a local tax and held that the
State constitution does not preclude the repeal, including the prospective
repeal, of a tax ordinance by an initiative, as contrasted with the State
constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition 218, by its
terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.
Article XIII D of Proposition 218 adds several new requirements making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge upon real property for a special benefit conferred upon the real
property.
Article XIII D of Proposition 218 also adds several provisions affecting "fees"
and "charges" which are defined as "any levy other than an ad valorem tax, a
special tax, or an assessment, imposed by a local government upon a parcel or
upon a person as an incident of property ownership, including a user fee or
charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or
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charge may be imposed or increased without majority approval by
the property owners subject to the fee or charge or, at the option of the local
agency, two-thirds voter approval by the electorate residing in the affected
area.
Proposition 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments approved by
voters on or after January 1, 1989.
New York Fund. As described in the New York Fund's prospectus, the Fund will
invest in bonds issued by the State of New York or its political subdivisions.
The Fund is therefore subject to various statutory, political and economic
factors unique to the State of New York. Discussed below are some of the more
significant factors that could affect the ability of the bond issuers to repay
interest and principal on New York securities owned by the Fund. The information
is derived from various public sources, all of which are available to investors
generally, and which the Fund believes to be accurate.Some of the significant
financial considerations relating to the New York Fund's investments in New York
Municipal Obligations are summarized below. This summary information is not
intended to be a complete description and is principally derived from the Annual
Information Statement of the State of New York as supplemented and contained in
official statements relating to issues of New York Municipal Obligations that
were available prior to the date of this Statement of Additional Information.
The accuracy and completeness of the information contained in those official
statements have not been independently verified.
The Fund's ability to achieve its investment objective is dependent upon the
ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York State
and New York City face long-term economic problems that could seriously affect
their ability and that of other issuers of New York Municipal Obligations to
meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including issuers
whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
Standard & Poor's and Moody's in recent years, Standard & Poor's and Moody's
have recently placed the debt obligations of New York State and New York City on
CreditWatch with positive implications and upgraded the debt obligations of New
York City, respectively. Strong demand for New York Municipal Obligations has
also at times had the effect of permitting New York Municipal Obligations to be
issued with yields relatively lower, and after issuance, to trade in the market
at prices relatively higher, than comparably rated municipal obligations issued
by other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York Municipal Obligations could result in
defaults or declines in the market values of those issuers' existing obligations
and, possibly, in the obligations of other issuers of New York Municipal
Obligations. Although as of the date of this Statement of Additional
information, no issuers of New York Municipal Obligations are in default with
respect to the payment of their Municipal Obligations, the occurrence of any
such default could affect adversely the market values and marketability of all
New York Municipal Obligations and, consequently, the net asset value of the
Fund's portfolio.
State Economy. New York is one of the most populous states in the nation and has
a relatively high level of personal wealth. The State's economy is diverse with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
State per capita personal income has historically been significantly higher than
the national average, although the ratio has varied substantially. Because New
York City (the "City") is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the "Governor") to
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or
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reappropriations and any new or modified revenue measures to be enacted in
connection with the executive budget. The entire plan constitutes the proposed
State financial plan for that fiscal year. The Governor is required to submit to
the Legislature quarterly budget updates which include a revised cash-basis
state financial plan, and an explanation of any changes from the previous state
financial plan.
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State's current fiscal year began on April 1, 1999 and
ends on March 31, 2000. On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
In 1999-2000, General Fund disbursements, including transfer to support capital
projects, debt service and other funds, are estimated at $37.36 billion, an
increase of $868 million or 2.38 percent over 1998-99. Projected spending under
the 1999-2000 enacted budget is $215 million above the Governor's Executive
Budget recommendations, including 30-day amendments. This change is the net
result of spending actions that occurred during negotiations on the Budget. The
increase in General Fund spending is comprised of $1.1 billion in legislative
additions to the Executive Budget (primarily in education), offset by various
actions, including re-estimates of required spending based on year-to-date
results and the identification of certain other resources that offset spending,
such as $250 million from commencing the process of privatizing the Medical
Malpractice Insurance Association (MMIA), $250 million from the retention of the
Debt Reduction Reserve Fund within the General Fund and about $100 million in
excess fund balances. The MMIA was established in 1983 to provide excess
liability insurance to doctors and medical providers. Legislation enacted with
the 1999-2000 budget initiates the process of MMIA privatization and transfers
excess fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for public
schools, the largest year-to-year increase in State history. The budget also
enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion in the
General Fund. The balance is comprised of the $1.82 billion surplus from 1998-99
that has been set aside to finance already-enacted tax cuts, $473 million in the
Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt Reduction
Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund (CRF), and
$200 million in the Community Projects Fund (CPF), which finances legislative
initiatives. The State expects to close 1999-2000 with cash balances in these
funds at their highest level ever.
Preliminary analysis by Division of Budget ("DOB") indicates that the State will
have a 2000-01 budget gap of approximately $1.9 billion, or about $300 million
above the 1999-2000 Executive Budget estimate (after adjusting for the projected
costs of collective bargaining). This estimate includes an assumption for the
projected costs of new collective bargaining agreements, $500 million in assumed
operating efficiencies, as well as the planned application of approximately $615
million of the $1.82 billion tax reduction reserve. In recent years, the State
has closed projected budget gaps which DOB estimates at $5.0 billion (1995-96),
$3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1 billion
(1998-99). DOB will formally update its projections of receipts and
disbursements for future years as part of the Governor's 2000-01 Executive
Budget submission. The revised expectations for these years will reflect the
cumulative impact of tax reductions and spending commitments enacted over the
last several years as well as new 2000-01 Executive Budget recommendations.
The General Fund is the principal operating fund of the State and is used to
account for all financial transactions except those required to be accounted for
in another fund. It is the State's largest fund and received almost all State
taxes and other resources not dedicated to particular purposes. In the State's
1999-2000 fiscal year, the General Fund (exclusive of transfers) is expected to
account for approximately 47.1 percent of all Governmental Funds disbursements
and 69.3 percent of total State Funds disbursements. General Fund moneys are
also transferred to other funds, primarily to support certain capital projects
and debt service payments in other fund types.
Total receipts and transfers from other funds are projected to be $39.31 billion
in 1999-2000, an increase of $2.57 billion over 1998-99. Total General Fund
disbursements and transfers to other funds are projected to be $37.36 billion,
an increase of $868 million over 1998-99. Total General Fund receipts and
transfers in 1999-2000 are now projected to be $39.31 billion, an increase of
$2.57 billion from the $36.74 billion recorded in 1998-99. This total includes
$35.93 billion in tax receipts, $1.36 billion in miscellaneous receipts, and
$2.02 billion in transfers from other funds. The transfer of the $1.82 billion
surplus recorded in 1998-99 to the 1999-2000 fiscal period has the effect of
exaggerating the growth in State receipts from year to year by depressing
reported 1998-99 figures and inflating 1999-2000 projections.
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Receipts from user taxes and fees are projected to total $7.35 billion, an
increase of $105 million from reported collections in the prior year. The sales
tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6 percent. Modest increases in motor fuel and auto
rental tax receipts over 1998-99 levels are also expected. However, receipts
from other user taxes and fees are estimated to decline by $177 million.
The yield of other excise taxes in this category, particularly the cigarette and
alcoholic beverage taxes, show long-term declining trends. General Fund declines
in 1999-2000 motor vehicle fee receipts, in contrast, reflect statutory fee
reductions and an increased amount of collections earmarked to the Dedicated
Highway and Bridge Trust Fund.
Significant statutory changes in this category during the 1999-2000 legislative
session include: delaying until March 1, 2000 the implementation of the
exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Following the pattern of the last two fiscal years, education programs receive
the largest share of new funding contained in the 1999-2000 Financial Plan.
School aid is expected to grow by $831 million or 8.58 percent over 1998-99
levels (on a State fiscal year basis). Outside of education, the largest growth
in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183 million),
and mental hygiene programs, including funding for a cost of living increase for
care providers ($114 million). These increases were offset, in part, by spending
reductions or actions in health and social welfare ($280 million), and in
general State charges ($222 million).
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Many complex political, social and economic forces influence the State's economy
and finances, which may in turn affect the State's Financial Plan. These forces
may affect the State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions, and organizations that are not subject
to the State's control. The State Financial Plan is also necessarily based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. The DOB believes that its projections of
receipts and disbursements relating to the current State Financial Plan, and the
assumptions on which they are based, are reasonable. The projections assume no
changes in federal tax law, which could substantially alter the current receipts
forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by which the
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
The State employs additional long-term financing mechanisms, lease-purchase and
contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing
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arrangements involve a contractual agreement by the State to make payments to a
public authority, municipality or other entity, the State's obligation to make
such payments is generally expressly made subject to appropriation by the
Legislature and the actual availability of money to the State for making the
payments. The State has also entered into a contractual-obligation financing
arrangement with the LGAC to restructure the way the State makes certain local
aid payments.
Sustained growth in the State's economy could contribute to closing projected
budget gaps over the next several years, both in terms of higher-than-projected
tax receipts and in lower-than-expected entitlement spending. The State assumes
that the 2000-01 Financial Plan will achieve $500 million in savings from
initiatives by State agencies to deliver services more efficiently, workforce
management efforts, maximization of federal and non-General Fund spending
offsets, and other actions necessary to help bring projected disbursements and
receipts into balance. The projections do not assume any gap-closing benefit
from the potential settlement of State claims against the tobacco industry.
Spending from Debt Service Funds are estimated at $3.64 billion in 1999-2000, up
$370 million or 11.31 percent from 1998-99. Transportation purposes, including
debt service on bonds issued for State and local highway and bridge programs
financed through the New York State Thruway Authority and supported by the
Dedicated Highway and Bridge Trust Fund, account for $124 million of the
year-to-year growth. Debt service for educational purposes, including State and
City University programs financed through the Dormitory Authority, will increase
by $80 million. The remaining growth is for a variety of programs in mental
health and corrections, and for general obligation financings.
On January 13, 1992, S&P reduced its ratings on the State's general obligation
bonds from A to A- and, in addition, reduced its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On
August 28, 1997, S&P revised its ratings on the State's general obligation bonds
from A- to A and revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On March 5, 1999, S&P
affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding limited-liability
State lease purchase and contractual obligations from A to Baa1. On February 28,
1994, Moody's reconfirmed its A rating on the State's general obligation
long-term indebtedness. On March 20, 1998, Moody's assigned the highest
commercial paper rating of P-1 to the short-term notes of the State. On March 5,
1999, Moody's affirmed its A2 rating with a stable outlook to the State's
general obligations.
New York State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
Litigation. Certain litigation pending against New York State or its officers or
employees could have a substantial or long-term adverse effect on New York State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) challenges to the constitutionality of
Public Health Law 2807-d, which imposes a gross receipts tax from certain
patient care services; (4) action seeking enforcement of certain sales and
excise taxes and tobacco products and motor fuel sold to non-Indian consumers on
Indian reservations; (5) a challenge to the Governor's application of his
constitutional line item veto authority; and (6) a challenge to the enactment of
the Clean Water/Clean Air Bond Act of 1996.
Several actions challenging the constitutionality of legislation enacted during
the 1990 legislative session which changed actuarial funding methods for
determining state and local contributions to state employee retirement systems
have been decided against the State. As a result, the Comptroller developed a
plan to restore the State's retirement systems to prior funding levels. Such
funding is expected to exceed prior levels by $116 million in fiscal 1996-97,
$193 million in fiscal 1997-98, peaking at $241 million in fiscal 1998-99.
Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State programs and
miscellaneous cure rights, tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial, generally
in excess of
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$100 million. These proceedings could affect adversely the financial condition
of the State in the current fiscal year or thereafter. Adverse developments in
these proceedings, other proceedings for which there are unanticipated,
unfavorable and material judgments, or the initiation of new proceedings could
affect the ability of the State to maintain a balanced financial plan. An
adverse decision in any of these proceedings could exceed the amount of the
reserve established in the State's financial plan for the payment of judgments
and, therefore, could affect the ability of the State to maintain a balanced
financial plan.
Although other litigation is pending against New York State, except as described
herein, no current litigation involves New York State's authority, as a matter
of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in part, to the
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, New York
State has provided financial assistance through appropriations, in some cases of
a recurring nature, to certain of the Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This operating assistance is expected to
continue to be required in future years. In addition, certain statutory
arrangements provide for State local assistance payments otherwise payable to
localities to be made under certain circumstances to certain Authorities. The
State has no obligation to provide additional assistance to localities whose
local assistance payments have been paid to Authorities under these
arrangements. However, in the event that such local assistance payments are so
diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued approximately $85
million of State-guaranteed bonds to refinance certain of its outstanding bonds
and notes in order to restructure and improve JDA's capital structure. Due to
concerns regarding the economic viability of its programs, JDA's loan and loan
guarantee activities had been suspended since 1995. As a result of the
structural imbalances in JDA's capital structure, and defaults in its loan
portfolio and loan guarantee program incurred between 1991 and 1996, JDA would
have experienced a debt service cash flow shortfall had it not completed its
recent refinancing. JDA anticipates that it will transact additional
refinancings in 1999, 2000 and 2003 to complete its long-term plan of finance
and further alleviate cash flow imbalances which are likely to occur in future
years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
New York City and Other Localities. The fiscal health of the State may also be
impacted by the fiscal health of its localities, particularly the City, which
has required and continues to require significant financial assistance from the
State. The City depends on State aid both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently projected
or that State budgets will be adopted by the April 1 statutory deadline or that
any such reductions or delays will not have adverse effects on the City's cash
flow or expenditures. In addition, the Federal budget negotiation process could
result in a reduction in or a delay in the receipt of Federal grants which could
have additional adverse effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the borrowing
ability of both the City and New York State. In that year the City lost access
to the public credit markets. The City was not able to sell short-term notes to
the public again until 1979. In 1975, S&P suspended its A rating of City bonds.
This suspension remained in effect until March 1981, at which time the City
received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
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upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion outstanding
general obligation bonds from A- to A.
New York City is heavily dependent on New York State and federal assistance to
cover insufficiencies in its revenues. There can be no assurance that in the
future federal and State assistance will enable the City to make up its budget
deficits. To help alleviate the City's financial difficulties, the Legislature
created the Municipal Assistance Corporation ("MAC") in 1975. Since its
creation, MAC has provided, among other things, financing assistance to the City
by refunding maturing City short-term debt and transferring to the City funds
received from sales of MAC bonds and notes. MAC is authorized to issue bonds and
notes payable from certain stock transfer tax revenues, from the City's portion
of the State sales tax derived in the City and, subject to certain prior claims,
from State per capita aid otherwise payable by the State to the City. Failure by
the State to continue the imposition of such taxes, the reduction of the rate of
such taxes to rates less than those in effect on July 2, 1975, failure by the
State to pay such aid revenues and the reduction of such aid revenues below a
specified level are included among the events of default in the resolutions
authorizing MAC's long-term debt. The occurrence of an event of default may
result in the acceleration of the maturity of all or a portion of MAC's debt.
MAC bonds and notes constitute general obligations of MAC and do not constitute
an enforceable obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to oversight and
review by the New York State Financial Control Board (the "Control Board") and
since 1978 the City's financial statements have been audited by independent
accounting firms. To be eligible for guarantees and assistance, the City is
required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial Plan
(the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and City University of New
York ("CUNY") and reflected the City's expense and capital budgets for the 1998
fiscal year, which were adopted on June 6, 1997. The 1998-2001 Financial Plan
projected revenues and expenditures for the 1998 fiscal year balanced in
accordance with GAAP. The 1998-99 Financial Plan initially projected General
Fund receipts (including transfers from other funds) of $36.22 billion, an
increase of $1.02 billion over the estimated 1997-1998 level. Recurring growth
in the State General Fund tax base was also projected to be approximately six
percent during 1998-99, after adjusting for tax law and administrative changes.
This growth rate is lower than the rates for 1996-97 or 1997-98, but roughly
equivalent to the rate for 1995-96.
Although the City has consistently maintained balanced budgets and is projected
to achieve balanced operating results for the current fiscal year, there can be
no assurance that the gap-closing actions proposed in the 1998-2001 Financial
Plan can be successfully implemented or that the City will maintain a balanced
budget in future years without additional State aid, revenue increases or
expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local economies, the impact on real estate tax revenues of
the real estate market, wage increases for City employees consistent with those
assumed in the 1998-2001 Financial Plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, the ability of the Health and Hospitals Corporation and the BOE to
take actions to offset reduced revenues, the ability to complete revenue
generating transactions, provision of State and Federal aid and mandate relief
and the impact on City revenues and expenditures of Federal and State welfare
reform and any future legislation affecting Medicare or other entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon the City's
ability to market its securities successfully. The City's financing program for
fiscal years 1998 through 2001 contemplates the issuance of $5.7 billion of
general obligation bonds and $5.7 billion of bonds to be issued by the proposed
New York City Transitional Finance Authority (the "Finance Authority") to
finance City capital projects. The Finance Authority, was created as part of the
City's effort to assist in keeping the City's indebtedness within the forecast
level of the constitutional restrictions on the amount of debt the City is
authorized to incur. Despite this additional financing mechanism, the City
currently projects that, if no further action is taken,
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it will reach its debt limit in City fiscal year 1999-2000. Indebtedness subject
to the constitutional debt limit includes liability on capital contracts that
are expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation which is currently on
appeal to the Court of Appeals were voided, projected contracts for the City
capital projects would exceed the City's debt limit. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
The City Comptroller and other agencies and public officials have issued reports
and made public statements which, among other things, state that projected
revenues and expenditures may be different from those forecast in the City's
financial plans. It is reasonable to expect that such reports and statements
will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. Although the City's 1998 fiscal year financial plan projected
$2.4 billion of seasonal financing, the City expected to undertake only
approximately $1.4 billion of seasonal financing. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. The delay in the adoption of the
State's budget in certain past fiscal years has required the City to issue
short-term notes in amounts exceeding those expected early in such fiscal years.
Certain localities, in addition to the City, have experienced financial problems
and have requested and received additional New York State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the State's
projections of its receipts and disbursements for the fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the re-establishment of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by New York State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the State to
assist Yonkers could result in increased State expenditures for extraordinary
local assistance.
On June 30, 1998, the City of Yonkers satisfied the statutory conditions for
ending the supervision of its finances by a State-ordered control board.
Pursuant to State law, the control board's powers over City finances lapsed six
months after the satisfaction of these conditions, on December 31, 1998.
Beginning in 1990, the City of Troy experienced a series of budgetary deficits
that resulted in the establishment of a Supervisory Board for the City of Troy
in 1994. The Supervisory Board's powers were increased in 1995, when Troy MAC
was created to help Troy avoid default on certain obligations. The legislation
creating Troy MAC prohibits the city of Troy from seeking federal bankruptcy
protection while Troy MAC bonds are outstanding. Troy MAC has issued bonds to
effect a restructuring of the City of Troy's obligations.
The 1998-99 budget included $29.4 million in unrestricted aid targeted to 57
municipalities across the State. Other assistance for municipalities with
special needs totals more than $25.6 million. Twelve upstate cities received
$24.2 million in one-time assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in some cases
eliminate, federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing the State assistance in the future.
Year 2000 Compliance. The State is currently addressing Year 2000 ("Y2K") data
processing compliance issues. Since its inception, the computer industry has
used a two-digit date convention to represent the year. In the year 2000, the
date field will contain "00" and, as a result, many computer systems and
equipment may not be able to process dates properly or may fail since they may
not be able to distinguish between the years 1900 and 2000. The Year 2000 issue
not only affects computer programs, but also the hardware, software and networks
on which they operate. In addition, any system or
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equipment that is dependent on an embedded chip, such as telecommunication
equipment and security systems, may also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Year 2000
compliance. The audit, which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology (OFT) will continue to monitor compliance progress for
the States mission-critical and high-priority systems and is reporting
compliance progress to the Governor's Office on a quarterly basis. The 1999-2000
enacted budget allocates $19 million for priority embedded systems and $20
million for unanticipated expenses related to bringing technology into Y2K
compliance. OFT reports that as of June 1999, the State had completed over 98
percent of the overall compliance effort for its mission-critical systems; 55 of
the 56 systems are now Year 2000 compliant. As of June 1999, the State had
completed 87 percent of the overall compliance effort on the high-priority
systems; 236 systems are now Year 2000 compliant. The State has also procured
independent validation and verification services from a qualified vendor to
perform an automated review of code that has been fixed and a testing review
process for all mission-critical systems which is scheduled to be completed by
September 1999.
While New York State is taking what it believes to be appropriate action to
address Year 2000 compliance, there can be no guarantee that all of the State's
systems and equipment will be Year 2000 compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Year 2000
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Year 2000 compliance could have an adverse
impact on State operations or finances as well.
INVESTMENT POLICIES AND TECHNIQUES
STRATEGIC TRANSACTIONS AND DERIVATIVES. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio, or enhancing potential gain. These
strategies may be executed through the use of derivative contracts.
In the course of pursuing these investment strategies, the Funds may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell futures contracts and options thereon, and enter into various transactions
such as swaps, caps, floors or collars (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (except to the
extent that 80% of the Funds' net assets are required to be invested in
tax-exempt municipal securities, and as limited by the Funds' other investment
restrictions and subject to certain limits imposed by the 1940 Act) to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Funds' portfolio resulting from securities markets
fluctuations, to protect the Funds' unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Funds' portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of each Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Funds to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Funds will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to a Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation a Fund can realize on its investments or cause
a Fund to hold a security it might otherwise sell. The use of
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options and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of that Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, a Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, a Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving a Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. A Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect a Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
Each Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 15% of its net assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require a Fund to hold a
security or instrument which it might otherwise have sold.
Each Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. Each Fund will not sell put options if, as a result, more than 50%
of such Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate or fixed-income market changes and for duration
management, and for risk management and return enhancement, purposes. Futures
are generally bought and sold on the commodities exchanges where they are
listed, with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by a Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
Each Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide
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hedging, risk management (including duration management) or other portfolio
management and return enhancement purposes. Typically, maintaining a futures
contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
Each Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which a
Fund may enter are interest rate and index and other swaps and the purchase or
sale of related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream a Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount
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of the two payments. Inasmuch as the Fund will segregate assets (or enter into
offsetting positions) to cover its obligations under swaps, the Adviser and each
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. Each Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the Counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or has an equivalent rating from an NRSRO or
is determined to be of equivalent credit quality by the Adviser. If there is a
default by the Counterparty, a Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by the Fund to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require that Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate cash or liquid assets
equal to the exercise price.
OTC options entered into by a Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when a Fund sells these
instruments it will only segregate an amount of cash or liquid assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and that Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, a Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if any,
of its obligations over its entitlements with respect to each swap on a daily
basis and will segregate an amount of cash or liquid assets having a value equal
to the accrued excess. Caps, floors and collars require segregation of assets
with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash or
liquid assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
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CERTIFICATES OF PARTICIPATION. A Fund may purchase Certificates of Participation
in trusts that hold Municipal Securities. A Certificate of Participation gives a
Fund an undivided interest in the Municipal Security in the proportion that the
Fund's interest bears to the total principal amount of the Municipal Security.
Certificates of Participation may be variable rate or fixed rate. Because
Certificates of Participation are interests in Municipal Securities that are
generally funded through government appropriations, they are subject to the risk
that sufficient appropriations as to the timely payment of principal and
interest on the underlying Municipal Securities may not be made. A Certificate
of Participation may be backed by a guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the Municipal Security
supporting the payment of principal and interest on the Certificate of
Participation. Payments of principal and interest would be dependent upon the
underlying Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates of Participation is based primarily upon the rating of the
Municipal Security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Funds' Advisor considers these factors as well as others, such as any
quality ratings issued by the rating services identified above, in reviewing the
credit risk presented by a Certificate of Participation and in determining
whether the Certificate of Participation is appropriate for investment by a
Fund. It is anticipated by the Funds' Advisor that, for most publicly offered
Certificates of Participation, there will be a liquid secondary market or there
may be demand features enabling a Fund to readily sell its Certificates of
Participation prior to maturity to the issuer or a third party.
INVESTMENT OF UNINVESTED CASH BALANCES. Each Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, each Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Scudder Kemper Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by each Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with Rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance each Fund's ability to
manage Uninvested Cash.
Each Fund will invest Uninvested Cash in Central Funds only to the extent that
each Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
INVERSE FLOATERS. Each of the Funds may invest in inverse floaters. Inverse
floaters are debt instruments with a floating rate of interest that bears an
inverse relationship to changes in short-term market interest rates. Investments
in thi9s type of security involve special risks as compared to investments in,
for example, a fixed rate municipal security. The fund could lose money and its
NAV could decline if movements in interest rates are incorrectly anticipated.
Moreover, the markets for securities of this type may be less developed and may
have less liquidity than the markets for more traditional municipal securities.
ADVANCE REFUNDED BONDS. A Fund may purchase Municipal Securities that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds from the new issue of bonds are typically placed in an escrow fund
consisting of U.S. Government obligations that are used to pay the interest,
principal and call premium on the issue being refunded. A Fund may also purchase
Municipal Securities that have been refunded prior to purchase by a Fund.
DELAYED DELIVERY TRANSACTIONS. A Fund may purchase or sell portfolio securities
on a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions involve a commitment by a Fund to purchase or sell securities with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed income securities to be
delivered in the future
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will fluctuate as interest rates vary. Because a Fund is required to set aside
cash or liquid securities to satisfy its commitments to purchase when-issued or
delayed delivery securities, flexibility to manage the Fund's investments may be
limited if commitments to purchase when-issued or delayed delivery securities
were to exceed 25% of the value of its assets.
When a Fund enters into a delayed delivery purchase, it becomes obligated to
purchase securities and it has all the rights and risks attendant to ownership
of a security, although delivery and payment occur at a later date. The value of
fixed income securities to be delivered in the future will fluctuate as interest
rates vary. At the time a Fund makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will record the transaction and
reflect the liability for the purchase and the value of the security in
determining its net asset value. Likewise, at the time a Fund makes the
commitment to sell a security on a delayed delivery basis, it will record the
transaction and include the proceeds to be received in determining its net asset
value; accordingly, any fluctuations in the value of the security sold pursuant
to a delayed delivery commitment are ignored in calculating net asset value so
long as the commitment remains in effect. A Fund generally has the ability to
close out a purchase obligation on or before the settlement date, rather than
take delivery of the security.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
its holds, exceed its net assets.
To the extent a Fund engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. The Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
SPECIAL RISK FACTORS -- HIGH YIELD (HIGH RISK) BONDS. Each Fund may invest up to
10% of its net assets without regard to the limitation that Municipal Securities
in which it invests be rated at the time of purchase within the four highest
grades by an NRSRO or of comparable quality as determined by the Fund's Advisor.
After a Fund has bought a security, its quality level may fall below the minimum
required for purchase by the Fund. That would not require the Fund to sell the
security, but the Advisor will consider such an event in determining whether a
Fund should continue to hold the security in its portfolio.
These lower rated and non-rated fixed income securities are commonly referred to
as "junk bonds" and are considered, on balance, to be predominantly speculative
as to the issuer's capacity to pay interest and repay principal in accordance
with the terms of the obligation, and they generally involve more credit risk
than securities in the higher rating categories. The market values of such
securities tend to reflect individual issuer developments to a greater extent
than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Lower rated securities also are more
sensitive to economic conditions than are higher rated securities. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based on fundamental analysis, may depress the prices for such securities. A
Fund may have difficulty disposing of certain high yield securities because
there may be a thin trading market for such securities. The lack of a liquid
secondary market may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing these
assets. The characteristics of the rating categories are described under
"Appendix -- Ratings of Investments."
ADDITIONAL INVESTMENT INFORMATION. Each Fund, may take full advantage of the
entire range of maturities of Municipal Securities and may adjust the average
maturity of its investments from time to time, depending on the Advisor's
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. However, it
is anticipated that, under normal market conditions, each such Fund will invest
primarily in long-term Municipal Securities (generally, maturities of fifteen
years or more).
A Fund will not normally engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, a Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities in anticipation
of a decline in interest rates. In addition, a security may be sold and another
of comparable quality purchased at approximately the same time to take advantage
of what the Fund believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various types of Municipal Securities or changes in the investment
objectives of some investors. Frequency of portfolio turnover will not be a
limiting factor should a
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Fund deem it desirable to purchase or sell securities. Taking advantage of the
exemption from the Florida intangibles tax could result in higher portfolio
turnover and related transactions costs. The portfolio turnover rates for the
Funds are listed under "Financial Highlights" in the Funds' prospectus. High
portfolio turnover (over 100%) involves correspondingly greater brokerage
commissions or other transaction costs. Higher portfolio turnover may result in
the realization of greater net short-term capital gains.
DIVIDENDS AND TAXES
DIVIDENDS. All the net investment income of a Fund is declared daily as a
dividend on shares for which the Fund has received payment. Net investment
income of a Fund consists of all interest income earned on portfolio assets less
all expenses of the Fund. Income dividends will be distributed monthly and
dividends of net realized capital gains will be distributed annually.
A Fund may at any time vary the foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Trust determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, a Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").
Income and capital gain dividends, if any, for a Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value except that, upon written request to the Shareholder Service
Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset value;
or
(2) To receive both income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have Fund dividends
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Purchase, Repurchase, and
Redemption of Shares-- Special Features-- Combined Purchases" for a list of such
other Kemper Funds. To use this privilege of investing a Fund's dividends in
shares of another Kemper Fund, shareholders must maintain a minimum account
value of $1,000 in the Fund distributing the dividends. The Funds will reinvest
dividend checks (and future dividends) in shares of that same Fund and class if
checks are returned as undeliverable. Dividends and other distributions of a
Fund in the aggregate amount of $10 or less are automatically reinvested in
shares of the Fund unless the shareholder requests that such policy not be
applied to the shareholder's account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. Each Fund
intends to meet the requirements of the Code applicable to regulated investment
companies distributing tax-exempt interest dividends and, therefore, dividends
representing net interest received on Municipal Securities will not be
includable by shareholders in their gross income for federal income tax
purposes, except to the extent such interest is subject to the alternative
minimum tax as discussed below. Dividends representing taxable net investment
income (such as net interest income from temporary investments in obligations of
the U.S. Government) and net short-term capital gains, if any, are taxable to
shareholders as ordinary income and long-term capital gain dividends are taxable
to shareholders as long-term capital gains, regardless of how long the shares
have been held and whether received in cash or shares. Gains attributable to
market discount on Municipal Securities acquired after April 30, 1993 are
treated as ordinary income. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 12 months. Dividends declared by a Fund in
October, November or December to shareholders of record as of a date in one of
those months and paid during the following January are treated as paid on
December 31 of the calendar year declared for federal income tax purposes.
A Fund's options and futures transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses, change the
character of certain gains or losses, or alter the holding periods of certain of
a Fund's securities. For federal income tax purposes, a Fund is generally
required to recognize its unrealized gains and losses at year end on financial
futures contracts, options thereon, index options and listed options on debt
securities. Any gain or loss recognized on such financial instruments is
generally considered to be 60% long-term and 40% short-term without regard to
the holding period of the contract or option.
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A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. The gain or loss
will be a capital gain or loss and will be long-term if the shares are held for
a period of more than one year. Any loss on shares held six months or less will
be a long-term capital loss to the extent any long-term capital gain
distribution is made with respect to such shares during the period the investor
owns the shares. In the case of shareholders holding shares of a Fund for six
months or less and subsequently selling those shares at a loss after receiving
an exempt-interest dividend, the loss will be disallowed to the extent of the
exempt-interest dividends received. However, the Secretary of the Treasury may
issue regulations to shorten the required holding period from six months to 31
days.
A shareholder who has redeemed shares of a Fund or any Kemper Mutual Fund listed
under "Purchase, Repurchase, and Redemption of Shares--Special Features--
Combined Purchases" may reinvest the amount redeemed at net asset value at the
time of the reinvestment in shares of any Fund or in shares of the other Kemper
Mutual Funds within six months of the redemption. If the redeemed shares were
purchased after October 3, 1989 and were held less than 91 days, then the lesser
of (a) the sales charge waived on the reinvestment shares, or (b) the sales
charge incurred on the redeemed shares, is included in the basis of the
reinvestment shares and is not included in the basis of the redeemed shares. If
a shareholder realizes a loss on the redemption or exchange of a Fund's shares
and reinvests in that same Fund's shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the wash sale rules
resulting in a postponement of the recognition of such loss for federal income
tax purposes. An exchange of a Fund's shares for shares of another fund is
treated as a redemption and reinvestment for federal income tax purposes upon
which gain or loss may be recognized.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Funds may not be
appropriate investments for persons who are "substantial users" of facilities
financed by industrial development bonds held by the Funds or are "related
persons" to such users; such persons should consult their tax advisers before
investing in the Funds.
The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12% of the excess of such corporation's "modified
alternative minimum taxable income" over $2 million. A portion of tax-exempt
interest, including exempt-interest dividends from a Fund, may be includible in
modified alternative minimum taxable income. Corporate shareholders are advised
to consult their tax advisers with respect to the consequences of the Superfund
Act.
A taxable dividend received shortly after the purchase of shares reduces the net
asset value of the shares by the amount of the dividend and, although in effect
a return of capital, will be taxable to the shareholder. If the net asset value
of shares were reduced below the shareholder's cost by dividends representing
gains realized on sales of securities, such dividends would be a return of
investment though taxable as stated above.
Net interest on certain "private activity bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may, therefore, be subject to
both the individual and corporate alternative minimum tax. To the extent
provided by regulations to be issued by the Secretary of the Treasury,
exempt-interest dividends from a Fund are to be treated as interest on "private
activity bonds" in proportion to the interest the Fund receives from private
activity bonds, reduced by allowable deductions. Exempt-interest dividends,
except to the extent of interest from "private activity bonds", are not treated
as a tax preference item. For a corporate shareholder, however, such dividends
will be included in determining such corporate shareholder's "adjusted current
earnings." Seventy-five percent of the excess, if any, of "adjusted current
earnings" over the corporate shareholder's alternative minimum taxable income
with certain adjustments will be a tax preference item. Corporate shareholders
are advised to consult their tax advisers with respect to alternative minimum
tax consequences.
Shareholders will be required to disclose on their federal income tax returns
the amount of tax-exempt interest earned during the year, including
exempt-interest dividends received from a Fund.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits. Modified
income includes adjusted gross income, tax-exempt interest, including
exempt-interest dividends from a Fund, and 50% of Social Security benefits.
California Fund. Dividends paid by the California Fund, to the extent of
interest received on California state and local government issues, will be
exempt from California income taxes provided at least 50% of the total assets of
the California Fund are invested in such issues at the close of each quarter in
the taxable year. Any short-term and long-term capital gain dividends will be
includable in California personal taxable income as dividend income and
long-term capital gain, respectively, and are taxed at ordinary income tax
rates. Dividends paid by the California Fund, including capital gain
distributions, will be taxable to corporate shareholders subject to the
California corporate franchise tax.
New York Fund. Dividends paid by the New York Fund representing net interest
received on New York Municipal Securities will be exempt from New York State and
New York City income taxes. Any short-term and long-term capital gain dividends
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will be includable in New York State and New York City taxable income as
dividend income and long-term capital gain, respectively, and are taxed at
ordinary income tax rates. Dividends paid by the New York Fund, including
capital gain distributions, will be taxable to corporate shareholders that are
subject to New York State and New York City corporate franchise tax.
General. The tax exemption of Fund dividends for federal income tax and, if
applicable, particular state or local tax purposes does not necessarily result
in exemption under the income or other tax laws of any other state or local
taxing authority. The laws of the several states and local taxing authorities
vary with respect to the taxation of interest income and investments, and
shareholders are advised to consult their own tax advisers as to the status of
their accounts under state and local tax laws. The Funds may not be appropriate
investments for qualified retirement plans and Individual Retirement Accounts.
The Trust is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for federal income tax purposes
will be provided after the end of the calendar year. Shareholders are encouraged
to retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The net asset value of shares of a Fund is computed as of the close
of regular trading (the "value time") on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most Market
Inc. ("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most
28
<PAGE>
recent bid quotation. An equity security which is traded on The Nasdaq Stock
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PERFORMANCE
The Funds may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return". Each of
these figures is based upon historical results and is not representative of the
future performance of any class of the shares. A Fund with fees or expenses
being waived or absorbed by Scudder Kemper may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
A Fund's historical performance or return for a class of shares may be shown in
the form of "yield," "tax equivalent yield," "average annual total return" and
"total return" figures. These various measures of performance are described
below. Performance information will be computed separately for each class. In
certain cases, Scudder Kemper has waived or reduced its management fee and
absorbed certain operating expenses for some of the Funds for the periods and to
the extent specified in the prospectus and this Statement of Additional
Information. See " Investment Advisor and Underwriter." Because of these waivers
and expense absorptions, the performance results for such Funds may be shown
with and without the effect of these waivers and expense absorptions.
Performance results not giving effect to waivers and expense absorptions will be
lower. Certain performance information set forth in this section for the New
York Fund are for the predecessor of the New York Fund, also named "Kemper New
York Tax-Free Income Fund."
Yield is a measure of the net investment income per share earned by a Fund over
a specific one-month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares (which is net asset value) at the end of the
period. Tax equivalent yield is the yield that a taxable investment must
generate in order to equal a Fund's yield for an investor in a stated combined
federal and state income tax bracket for the Funds. Average annual total return
and total return measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of, the
underlying investments in a Fund.
A Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. Because Class S is a new
share class, no numbers are available.
A Fund's yield is computed by dividing the net investment income per share
earned during the specified one-month or 30-day period by the maximum offering
price per share (which is net asset value) on the last day of the period,
according to the following formula:
YIELD = 2 [ (a - b +1 )6 - 1]
-----
cd
Where:
A = Dividends and interest earned during the period.
B = Expenses accrued for the period (net of
reimbursements).
29
<PAGE>
C = The average daily number of shares outstanding
during the period that were entitled to receive
dividends.
D = The maximum offering price per share
on the last day of the period (which is
net asset value).
In computing the foregoing yield, the Trust follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that the Trust uses to
prepare its annual and interim financial statements in conformity with generally
accepted accounting principles.
Each Fund's tax equivalent yield is computed by dividing that portion of the
Fund's yield (computed as described above) that is tax-exempt by one minus the
stated federal income tax rate and adding the result to that portion, if any, of
the yield of the Fund that is not tax-exempt. For additional information
concerning tax-exempt yields, see "Tax-Exempt versus Taxable Yield" below.
Because Class S is a new share class, no numbers are available .
A Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is then
divided by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period. Average annual
total return figures for various periods are set forth in the table below.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in the Fund's shares on the first day of the period, and
computing the "ending value" of that investment at the end of the period. The
total return percentage is then determined by subtracting the initial investment
from the ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends paid by the Fund have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period. Total return figures for various periods are set forth in the table
below.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund for the
period in question, assuming the reinvestment of all dividends. Thus, these
figures reflect the change in the value of an investment in a Fund during a
specified period. Average annual total return will be quoted for at least the
one-, five- and ten-year periods ending on a recent calendar quarter (or if such
periods have not yet elapsed, at the end of a shorter period corresponding to
the life of a Fund for performance purposes). Average annual total return
figures represent the average annual percentage change over the period in
question. Total return figures represent the aggregate percentage or dollar
value change over the period in question.
A Fund's performance figures are based upon historical results and are not
necessarily representative of future performance.
Class S shares are sold at net asset value. Redemptions of Class B shares may be
subject to a contingent deferred sales charge that is 4% in the first year
following the purchase, declines by a specified percentage each year thereafter
and becomes zero after six years. Returns and net asset value will fluctuate.
Factors affecting a Fund's performance include general market conditions,
operating expenses and investment management. Any additional fees charged by a
dealer or other financial services firm would reduce the returns described in
this section. Shares of a Fund are redeemable at the then current net asset
value of the Fund, which may be more or less than original cost.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes such as the Lehman Brothers Municipal Bond Index
and the Salomon Brothers High Grade Bond Index, and may also be compared to the
performance of other fixed income, state municipal bond funds (as applicable) or
general municipal bond mutual funds or mutual fund indexes as reported by
independent mutual fund reporting services such as Lipper Analytical Services,
Inc. ("Lipper"). Lipper performance calculations are based upon changes in net
asset value with all dividends reinvested and do not include the effect of any
sales charges.
Information may be quoted from publications such as Morningstar Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank
30
<PAGE>
product performance may be based upon, among other things, the BANK RATE MONITOR
National Index(TM) or various certificate of deposit indexes. Money market fund
performance may be based upon, among other things, IBC'sMoney Fund Report(R) or
Money Market Insight(R), reporting services on money market funds. Performance
of U.S. Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return, and guaranteed principal and may be insured.
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
A Fund may include in its sales literature and shareholder reports a quotation
of the current "distribution rate" for a class of a Fund. Distribution rate is
simply a measure of the level of dividends distributed for a specified period.
It differs from yield, which is a measure of the income actually earned by the
Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of such investments during the period. Distribution rate is,
therefore, not intended to be a complete measure of performance. Distribution
rate may sometimes be greater than yield since, for instance, it may include
gains from the sale of options or other short-term and possibly long-term gains
(which may be non-recurring) and may not include the effect of amortization of
bond premiums. As reflected under "Investment Policies and Techniques --
Additional Investment Information," option writing can limit the potential for
capital appreciation.
There may be quarterly periods following the periods reflected in the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.
Investors may want to compare a Fund's performance to that of certificates of
deposit offered by banks and other depository institutions. Certificates of
deposit represent an alternative (taxable) income producing product.
Certificates of deposit may offer fixed or variable interest rates and principal
is guaranteed and may be insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time specified by the
issuing institution. The shares of a Fund are not insured and net asset value as
well as yield will fluctuate. Shares of a Fund are redeemable at net asset value
which may be more or less than original cost. The bonds held by a Fund are
generally of longer term than most certificates of deposit and may reflect
longer term market interest rate fluctuations.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. The net asset value of a Fund will fluctuate. Shares of a Fund are
redeemable at net asset value which may be more or less than original cost. Each
Fund's yield will also fluctuate.
Investors may also want to compare performance of a Fund to that of money market
funds. Money market fund yields will fluctuate and shares are not insured, but
share values usually remain stable.
From time to time, a Fund may compare its after-tax total return to that of
taxable investments, including but not limited to certificates of deposit,
taxable money market funds or U.S. Treasury bills. Tax equivalent total return
represents the total return that would be generated by a taxable investment that
produced the same amount of after-tax income and change in net asset value as
the Fund in each period.
TAX-EXEMPT VERSUS TAXABLE YIELD. You may want to determine which investment --
tax-exempt or taxable -- will provide you with a higher after-tax return. To
determine the taxable equivalent yield, simply divide the yield from the
tax-exempt investment by 1minus your marginal tax rate. The tables below are
provided for your convenience in making this calculation for selected tax-exempt
yields and taxable income levels. These yields are presented for purposes of
illustration only and are not representative of any yield that any class of
shares of a Fund may generate. The tables are based upon the 1999 federal and
state tax rates and brackets.
31
<PAGE>
<TABLE>
<CAPTION>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under $124,500
A Tax-Exempt Yield of:
Taxable Income Your Marginal 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,350-$61,400 $42,350-$102,300 28.0% 5.56 6.94 8.33 9.72 11.11 12.50
Over $61,400 Over $102,300 31.0% 5.80 7.25 8.70 10.14 11.59 13.04
Combined A Tax-Exempt Yield of:
Taxable Income California and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ------------------------------------------------------
$25,350 - $26,644 $42,350 - $53,288 32.3% 5.91 7.39 8.86 10.34 11.82 13.29
$26,644 - $33,673 $53,288 - $67,376 33.8% 6.04 7.55 9.06 10.57 12.08 13.60
$53,673 - $61,400 $67,376 - $102,300 34.7% 6.13 7.66 9.19 10.72 12.25 13.78
Over $61,400 Over $102,300 37.4% 6.39 7.99 9.58 11.18 12.78 14.38
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
$124,500 (continued)
Combined A Tax-Exempt Yield of:
N.Y. City, N.Y. 4% 5% 6% 7% 8% 9%
Taxable Income State and
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ------------------------------------------------------
$25,350 - $61,400 $42,350 - $02,300 36.1% 6.26 7.82 9.39 10.95 12.52 14.08
Over $61,400 Over $102,300 38.8% 6.54 8.17 9.80 11.44 13.07 14.78
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over $124,500 *
A Tax-Exempt Yield of:
Taxable Income Your Marginal 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ------------------------------------------------------
$61,400 - $128,100 $102,300 - $155,950 31.9% 5.87 7.34 8.81 10.28 11.75 13.25
$128,100 - $278,450 $155,950 - $278,450 37.1% 6.36 7.95 9.54 11.13 12.72 14.31
Over $278,450 Over $278,450 40.8% 6.76 8.45 10.14 11.82 13.51 15.21
A Tax-Exempt Yield of:
Taxable Income Your California and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ------------------------------------------------------
$61,400 - $128,100 $102,300 - $155,950 38.2% 6.74 8.09 9.71 11.33 12.94 14.56
$128,100 - $278,450 $155,950 - $278,450 42.9% 7.01 8.76 10.51 12.26 14.01 15.76
Over $278,000 Over $278,450 46.3% 7.59 9.49 11.39 13.28 15.18 17.08
32
<PAGE>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over $124,500 (continued)*
Combined
N.Y. City, N.Y. A Tax-Exempt Yield of:
Taxable Income State and 4% 5% 6% 7% 8% 9%
Single Joint Federal Tax Rate Is Equivalent to a Taxable Yield of
------ ----- ---------------- ------------------------------------------------------
$61,400 - $128.100 $102,300 - $155,950 39.6% 6.65 8.28 9.93 11.59 13.25 14.90
$128,100 - $278,450 $155,950 - $278,450 44.2% 7.17 8.96 10.75 12.54 14.34 16.13
Over $278,450 Over $278,450 47.5% 7.62 9.52 11.43 13.33 15.24 17.14
</TABLE>
* This table assumes a decrease of $3.00 of itemized deductions for each $100
of adjusted gross income over $121,200. For a married couple with an
adjusted gross income between $181,800 and $304,300 (single between
$121,200 and $243,700), add 0.7% to the above Marginal Federal Tax Rate for
each personal and dependency exemption. The taxable equivalent yield is the
tax-exempt yield divided by: 100% minus the adjusted tax rate. For example,
if the table tax rate is 37.1% and you are married with no dependents, the
adjusted tax rate is 38.5% (37.1% + 0.7% + 0.7%). For a tax-exempt yield of
6%, the taxable equivalent yield is about 9.8% (6% / (100% - 38.5%)).
** The tables do not reflect the impact of the New York State Tax Table
Benefit Recapture that is intended to eliminate the benefit of the
graduated rate structure and applies to taxable income between $100,000 and
$150,000.
INVESTMENT ADVISOR AND UNDERWRITER
INVESTMENT ADVISOR. Scudder Kemper Investments, Inc. ("Scudder Kemper" or "the
Advisor"), 345 Park Avenue, New York, New York, is the Trust's investment
Advisor. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
a newly formed global insurance and financial services company. The balance of
the Advisor is owned by its officers and employees. There is a separate
investment management agreement for each of the State Funds. The agreements are
substantially the same. Pursuant to the investment management agreements,
Scudder Kemper acts as each Fund's investment adviser, manages its investments,
administers its business affairs, furnishes office facilities and equipment,
provides clerical and administrative services and permits any of its officers or
employees to serve without compensation as trustees or officers of the Trust if
elected to such positions. The agreements provide that the Trust pays the
charges and expenses of its operations including the fees and expenses of the
trustees (except those who are officers or employees of Scudder Kemper),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value and maintaining all
accounting records thereto, taxes and membership dues.
The Trust bears the expenses of registration of its shares with the Securities
and Exchange Commission and, effective January 1, 2000, pays the cost of
qualifying and maintaining the qualification of the Trust's shares for sale
under the securities laws of the various states ("Blue Sky expenses"). Prior to
January 1, 2000, Kemper Distributors, Inc. ("KDI"), as principal underwriter,
paid the Blue Sky expenses.
Scudder Kemper has agreed to reimburse the California Fund should all operating
expenses of the California Fund, including the compensation of Scudder Kemper,
but excluding taxes, interest, distribution services fees, extraordinary
expenses, and brokerage commissions or transaction costs, exceed 1 1/2% of the
first $30 million of average daily net assets and 1% of average daily net assets
over $30 million on an annual basis.
The agreements provide that Scudder Kemper shall not be liable for any error of
judgment or of law, or for any loss suffered by the Trust in connection with the
matters to which the agreements relate, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Scudder Kemper in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreements.
Each of the investment management agreements continues in effect from year to
year so long as its continuation is approved at least annually by a majority of
the trustees of the applicable Trust who are not parties to such agreement or
interested persons of any such party except in their capacity as trustees of the
Trust and by the shareholders of the Fund subject thereto or the Board of
Trustees. Each agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund
subject thereto, and will terminate automatically upon assignment. If additional
Funds become subject to the investment management agreements, the provisions
concerning continuation, amendment and termination shall be on a Fund by Fund
basis. Additional Funds may be subject to a different agreement.
Responsibility for overall management of the Trust rests with its Board of
Trustees and officers. Professional investment supervision is provided by
Scudder Kemper. The investment management agreement for a Fund provides that
Scudder Kemper shall act as the Fund's investment adviser, manage its
investments and provide the Fund with various services and facilities.
33
<PAGE>
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former Advisor to each Fund, and Scudder
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees. In certain cases the investments
for the Fund are managed by the same individuals who manage one or more other
mutual funds advised by the Adviser that have similar names, objectives and
investment styles as the Fund. You should be aware that the Fund is likely to
differ from these other mutual funds in size, cash flow pattern and tax matters.
Accordingly, the holdings and performance of the Fund can be expected to vary
from those of the other mutual funds.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders. On October 17, 2000, the dual holding
company structure of Zurich Financial Services Group, comprised of Allied Zurich
p.l.c. in the United Kingdom and Zurich Allied A.G. in Switzerland, was unified
into a single Swiss holding company, Zurich Financial Services.
Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting in December 1998.
The current investment management fee rates paid by the Funds are as follows:
Each Fund pays Scudder Kemper an investment management fee, payable monthly, at
the annual rate (computed separately for each State Fund ) of 0.55% of the first
$250 million of average daily net assets, 0.52% of average daily net assets
between $250 million and $1 billion, 0.50% of average daily net assets between
$1 billion and $2.5 billion, 0.48% of average daily net assets between $2.5
billion and $5 billion, 0.45% of average daily net assets between $5 billion and
$7.5 billion, 0.43% of average daily net assets between $7.5 billion and $10
billion, 0.41% of average daily net assets between $10 billion and $12.5 billion
and 0.40% of average daily net assets over $12.5 billion.
The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below.
Fund Fiscal 2000 Fiscal 1999 Fiscal 1998
---- ----------- ----------- -----------
California
New York
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Funds and maintaining all accounting records related thereto. Currently,
SFAC receives no fee for its services to the Funds.
PRINCIPAL UNDERWRITER. The Trust has an underwriting agreement with Scudder
Investor Services, Inc., Two International Place, Boston, MA 02110 (the
"Distributor"), a Massachusetts corporation, which is a subsidiary of the
Adviser, a Delaware corporation. The underwriting agreement, dated __________,
will remain in effect until ____________, and from year to year thereafter only
if its continuance is approved annually by a majority of the Trustees who are
not parties to such agreement or interested persons of any such party, and
either by a vote of a majority of the Trustees or a majority of the outstanding
voting securities of the Fund.
Under the underwriting agreement, the each Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Fund
34
<PAGE>
as a broker or dealer in the various states as required; the fees and expenses
of preparing, printing and mailing prospectuses annually to existing
shareholders (see below for expenses relating to prospectuses paid by the
Distributor), notices, proxy statements, reports or other communications to
shareholders of the Fund; the cost of printing and mailing confirmations of
purchases of shares and any prospectuses accompanying such confirmations; any
issuance taxes and/or any initial transfer taxes; a portion of shareholder
toll-free telephone charges and expenses of shareholder service representatives;
the cost of wiring funds for share purchases and redemptions (unless paid by the
shareholder who initiates the transaction); the cost of printing and postage of
business reply envelopes; and a portion of the cost of computer terminals used
by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of the Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by the Fund, unless a 12b-1 Plan is in effect which
provides that the Fund shall bear some or all of such expenses.
Note: Although the Funds do not currently have a 12b-1 Plan, the Funds would
also pay those fees and expenses permitted to be paid or assumed by the
Funds pursuant to a 12b-1 Plan, if any, were adopted by the Funds,
notwithstanding any other provision to the contrary in the underwriting
agreement.
As agent, the Distributor currently offers each Fund's shares on a
continuous basis to investors in all states in which shares of the Funds may
from time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of the Funds.
ADMINISTRATIVE SERVICES. TO BE UPDATED: Administrative services are provided to
the Trust under an administrative services agreement ("administrative
agreement") with KDI. KDI bears all its expenses of providing services pursuant
to the administrative agreement between Scudder Kemper and the Trust, including
the payment of service fees. For the services under the administrative
agreement, each Fund pays KDI an administrative services fee, payable monthly,
at the annual rate of up to 0.25% of average daily net assets of each class of
the Fund.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms"), that provide services and facilities
for their customers or clients who are investors of a Trust. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Trust, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation.
The Fund and KDI further agree that the administrative service fee will be
computed at an annual rate of 0.15 of 1% based upon the assets with respect to
which KDI provides administrative services. Firms to which service fees may be
paid include broker-dealers affiliated with KDI. The administrative services fee
may be increased to an annual rate of 0.25% of average daily net assets of any
class of the Trust in the discretion of the Board of Trustees and without
shareholder approval.
The following information concerns the administrative services fee paid by each
Fund for the fiscal years ended 1998, 1997 and 1996:
TO BE UPDATED:
<TABLE>
<CAPTION>
Service Fees Paid
Total Service Fees Paid by by Administrator
Administrative Administrator to Kemper
Service Fees Paid by Funds to Firms Affiliated Firms
-------------------------- -------- ----------------
Fiscal
Fund Year Class S
---- ---- -------
<S> <C> <C> <C> <C>
California
35
<PAGE>
Total Service Fees Paid by by Administrator
Administrative Administrator to Kemper
Service Fees Paid by Funds to Firms Affiliated Firms
-------------------------- -------- ----------------
Fiscal
Fund Year Class S
---- ---- -------
New York
</TABLE>
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Trust. Currently, the
administrative services fee payable to KDI is based only upon Trust assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fees that it receives from the
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of the Trust while this procedure is
in effect will depend upon the proportion of Trust assets that is in accounts
for which there is a firm of record, the date when shares representing such
assets were purchased. The Board of Trustees of a Trust, in its discretion, may
approve basing the fee to KDI on all Trust assets in the future. In addition,
KDI may, from time to time, from its own resources pay certain firms additional
amounts for ongoing administrative services and assistance provided to their
customers and clients who are shareholders of the Funds.
Certain trustees or officers of the Trust are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, ("State Street") as custodian,
has custody of all securities and cash of the Trust. It attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by the Trust. State Stree is also the Trust's
transfer agent and dividend-paying agent. Pursuant to a services agreement,
Kemper Service Company ("KSvC"), an affiliate of Scudder Kemper, serves as
"Shareholder Service Agent" of the Trust and, as such, performs all of State
Street's duties as transfer agent and dividend paying agent. State Street
receives as transfer agent, and pays to KSvC as follows: annual account fees of
$14.00 ($23.00 for retirement accounts) plus account set up charges, an asset
based fee of 0.02% and out-of-pocket expense reimbursement. State Street's fee
is reduced by certain earnings credits in favor of the Trust. For the State
Trust for the fiscal year ended August 31, 2000, State Street remitted
shareholder service fees in the amount of $____________ to KSvC as Shareholder
Service Agent.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Trust's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on such Trust's annual financial statements, review certain
regulatory reports and such Trust's federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by the Trust. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
LEGAL COUNSEL Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to each Fund.
BROKERAGE COMMISSIONS
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for a Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Advisor seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by a Fund to reported commissions paid by others. The Advisor
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.
The Funds' purchases and sales of fixed income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
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<PAGE>
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply research, market and statistical information to a
Fund. The term "research and market statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchases or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Advisor is authorized when placing portfolio transactions for a Fund to pay
a brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research, market or statistical information. The Advisor may place orders
with broker/dealers on the basis that the broker/dealer has or has not sold
shares of a Fund. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor, the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Advisor, it is the opinion of
the Advisor that such information only supplements the Advisor's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than a Fund, and not all such information is used by
the Advisor in connection with a Fund. Conversely, such information provided to
the Advisor by broker/dealers through whom other clients of the Advisor effect
securities transactions may be useful to the Advisor in providing services to a
Fund.
The Trustees review from time to time whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable.
The table below shows approximate brokerage commissions paid by each Fund then
existing for the last three fiscal years and for the most recent fiscal year,
the percentage thereof that was allocated to firms based upon research
information provided.
<TABLE>
<CAPTION>
Allocated to
Firms Based on
Research in
Fund Fiscal 1999 Fiscal 1999 Fiscal 1998
---- ----------- ----------- -----------
<S> <C> <C> <C> <C>
California $89,658 94.03% $1,464,000 $1,463,000
New York $26,862 100% $701,000 $ 594,000
</TABLE>
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
PURCHASE OF SHARES
Shareholders should maintain a share balance worth at least $2,500 for
Class S. For fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts, the minimum
balance is $1,000 for Class S. These amounts may be changed by the Board of
Trustees. A shareholder may open an account with at least $1,000 ($500 for
fiduciary/custodial accounts), if an automatic investment plan (AIP) of
$100/month ($50/month for fiduciary/custodial accounts) is established. Group
retirement plans and certain other accounts have similar or lower minimum share
balance requirements.
The Funds reserve the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S assess an annual $10 per Fund charge (with the Fee to be
paid to the Fund) for any non-fiduciary/non-custodial account without
an automatic investment plan (AIP) in place and a balance of less than
$2,500 for Class S shareholders; and
37
<PAGE>
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of
the account. The Fund will mail the proceeds of the redeemed account
to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Share certificates are issued only on request to the Fund and may not be
available for certain types of accounts. It is recommended that investors not
request share certificates unless needed for a specific purpose. You cannot
redeem shares by telephone or wire transfer or use the telephone exchange
privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Trust to redeem his or her shares. When
shares are held for the account of a shareholder by the Trust's transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Funds, Attention: Redemption Department, P.O. Box 419557,
Kansas City, Missouri 64141-6557. When certificates for shares have been issued,
they must be mailed to or deposited with the Shareholder Service Agent, along
with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed requested
accompanied by any outstanding share certificates in proper form for transfer.
When a Trust is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, Express-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Trust of the purchase
amount.
Because of the high cost of maintaining small accounts, a Fund may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
Exchange, normally 4 p.m. eastern time. Proceeds in the amount of your purchase
will be transferred from your bank checking account two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. QuickBuy requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day. If you purchase shares by QuickBuy and redeem them within seven
days of the purchase, the Fund may hold the redemption proceeds for a period of
up to seven business days. If you purchase shares and there are insufficient
funds in your bank account the purchase will be canceled and you will be subject
to any losses or fees incurred in the transaction. QuickBuy transactions are not
available for most retirement plan accounts. However, QuickBuy transactions are
available for Scudder IRA accounts.
38
<PAGE>
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate section on
the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
Pension and Profit-Sharing, Scudder 401(k) and Scudder 403(b)
Planholders) who wish to establish telephone redemption to a
predesignated bank account or who want to change the bank account
previously designated to receive redemption payments should either
return a Telephone Redemption Option Form (available upon request) or
send a letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. An original signature
and an original signature guarantee are required for each person in
whose name the account is registered.
Telephone redemption is not available with respect to shares
represented by share certificates or shares held in certain retirement accounts.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
39
<PAGE>
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
SPECIAL FEATURES
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares
40
<PAGE>
for shares of the same class of another such Kemper Fund. If selected, exchanges
will be made automatically until the privilege is terminated by the shareholder
or the other Kemper Fund. Exchanges are subject to the terms and conditions
described above under "Exchange Privilege," except that the $1,000 minimum
investment requirement for the Kemper Fund acquired on exchange is not
applicable. This privilege may not be used for the exchange of shares held in
certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Purchase, Repurchase and Redemption of Shares--General." Once
enrolled in EXPRESS-Transfer, a shareholder can initiate a transaction by
calling Kemper Shareholder Services toll free at 1-800-621-1048 Monday through
Friday, 8:00 a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this
privilege by sending written notice to Kemper Service Company, P.O. Box 419415,
Kansas City, Missouri 64141-6415. Termination will become effective as soon as
the Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts.
BANK DIRECT DEPOSIT. A shareholder may purchase additional Fund shares through
an automatic investment program. With the Bank Direct Deposit Purchase Plan,
investments are made automatically (minimum $50, maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Trust and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
A Trust may immediately terminate a shareholder's Plan in the event that any
item is unpaid by the shareholder's financial institution. A Trust may terminate
or modify this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Trust is not responsible for the efficiency of the
employer or government agency making the payment or any financial institution
transmitting payment.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value) may provide for the payment from
the owner's account of any requested dollar amount to be paid to the owner or a
designated payee monthly, quarterly, semiannually or annually. The minimum
periodic payment is $100. Shares are redeemed so that the payee will receive
payment approximately the first of the month. Any income and capital gain
dividends will be automatically reinvested at net asset value. A sufficient
number of full and fractional shares will be redeemed to make the designated
payment. Depending upon the size of the payments requested and fluctuations in
the net asset value of the shares redeemed, redemptions for the purpose of
making such payments may reduce or even exhaust the account.
ADDITIONAL TRANSACTION INFORMATION
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. Management does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of a Fund. In some
instances, such
41
<PAGE>
discounts, commissions or other incentives will be offered only to certain firms
who sell or are expected to sell during specified time periods certain minimum
amounts of shares of a Fund, or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of such Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value of such Fund effective on that
day ("trade date"). The Trust reserves the right to determine the net asset
value more frequently than once a day if deemed desirable. Dealers and other
financial services firms are obligated to transmit orders promptly. Collection
may take significantly longer for a check drawn on a foreign bank than for a
check drawn on a domestic bank. Therefore, if an order is accompanied by a check
drawn on a foreign bank, funds must normally be collected before shares will be
purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund shares. Some may establish higher minimum
investment requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
Fund shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Trust's transfer agent will have no
information with respect to or control over accounts of specific shareholders.
Such shareholders may obtain access to their accounts and information about
their accounts only from their firm. Certain of these firms may receive
compensation from the Trust through the Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of KDI, may receive compensation from the Trust through the
Shareholder Service Agent for these services.
The Trust reserves the right to withdraw all or any part of the offering made
herein and to reject purchase orders. Also, from time to time, the Trust may
temporarily suspend the offering of any class of the shares of a Fund to new
investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Code of Ethics
The Funds, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Funds, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Funds. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their birthdates, their principal
occupations and their affiliations, if any, with Scudder Kemper, the Trust's
Advisor and KDI, the Trust's principal underwriter, are as follows:
JOHN W. BALLANTINE (2/16/46), Trustee, 1500 North Lake Shore Drive, Chicago,
Illinois; First Chicago NBD Corporation/The First National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer; 1995-1996
Executive Vice President and Head of International Banking; 1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.
LEWIS A. BURNHAM (1/8/33), Trustee, 16410 Avila Boulevard, Tampa, Florida;
Retired; formerly, Partner, Business Resources Group; formerly, Executive Vice
President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee, 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A.O. Smith Corporation
(diversified manufacturer).
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<PAGE>
ROBERT B. HOFFMAN (12/11/36), Trustee, 1530 North State Parkway, Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries); formerly Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural, pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations, FMC Corporation (manufacturer
of machinery and chemicals).
DONALD R. JONES (1/17/30), Trustee, 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General, U.S. Department of Justice; Director, Bethlehem Steel Corp.
WILLIAM P. SOMMERS (7/22/33), Trustee, 24717 Harbour View Drive, Ponte Vedra
Beach, Florida; Consultant and Director, SRI Consulting; formerly President and
Chief Executive Officer, SRI International (research and development); formerly,
Executive Vice President, Iameter (medical information and educational service
provider); prior thereto, Senior Vice President and Director, Booz, Allen &
Hamilton Inc. (management consulting firm)(retired); Director, Rohr, Inc.,
Therapeutic Discovery Corp. and Litton Industries.
THOMAS W. LITTAUER (4/26/55), Trustee, Chairman and Vice President*, Two
International Place, Boston, Massachusetts; Managing Director, Adviser;
formerly, Head of Broker Dealer Division of an unaffiliated investment
management firm during 1997; prior thereto, President of Client Management
Services of an unaffiliated investment management firm from 1991 to 1996.
LINDA C. COUGHLIN ( / / ), Trustee, Two International Place, Boston,
Massachusetts; Managing Director, Adviser
MARK S. CASADY (9/21/60), President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser; formerly, Institutional Sales Manager of an
unaffiliated mutual fund distributor.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary,
Adviser.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
ELEANOR R. BRENNAN. ( / / ), Vice President*,
ASHTON P. GOODFIELD ( / / ), Vice President*,
* Interested persons as defined in the Investment Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Funds. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during The
Trust's 2000 fiscal year.
43
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Compensation from Funds Pension or Total
----------------------- Retirement Compensation
Benefits Accrued from Trust
Name of Trustee State Trust As Part of Fund Expenses Paid to Trustees**
--------------- ----------- ------------------------ ------------------
<S> <C> <C> <C>
John W. Ballantine
Lewis A. Burnham
Donald L. Dunaway*
Robert B. Hoffman
Donald R. Jones
Shirley D. Peterson
William P. Sommers
</TABLE>
* Includes deferred fees. Pursuant to deferred compensation agreements with
the Funds, deferred amounts accrue interest monthly at a rate approximate
to the yield of Zurich Money Funds -- Zurich Money Market Fund. Total
deferred fees (including interest thereon) payable from the Funds to Mr.
Dunaway are $---------.
** Includes compensation for service on the boards of 25 Kemper funds with 41
fund portfolios. Each trustee currently serves as a trustee of 27 Kemper
funds with 46 fund portfolios.
As of _____________, the officers and trustees of the Funds, as a group, owned
less than 1% of the then outstanding shares of each Fund. No person owned of
record 5% or more of the outstanding shares of any class of any Fund, except
that the following owned of record shares of the following Funds:
Kemper California Tax-Free Income
------------------------------------- -----------------------------------
NAME PERCENTAGE
------------------------------------- -----------------------------------
Smith Barney Inc.
Mutual Fund/Comm. Dept.
333 W. 34th Street
New York, NY 10001
------------------------------------- -----------------------------------
BHC Securities, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
------------------------------------- -----------------------------------
First Union Securities
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
------------------------------------- -----------------------------------
Dean Witter Reynolds
Mutual Funds Operations
5 World Trade Center
New York, NY 10048
------------------------------------- -----------------------------------
National Financial Services Corp.
200 Liberty Street
New York, NY 10281
------------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
------------------------------------- -----------------------------------
BHC Securities, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
------------------------------------- -----------------------------------
44
<PAGE>
------------------------------------- -----------------------------------
First Union Securities
Commission Accounting
77 W. Wacker Drive
Chicago, IL 60601
------------------------------------- -----------------------------------
Dean Witter Reynolds
Mutual Funds Operations
5 World Trade Center
New York, NY 10048
------------------------------------- -----------------------------------
Helena G. Hale, TTEE
803 Paseo Alicante
Santa Barbara, CA 93103
------------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner &
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
------------------------------------- -----------------------------------
Dean Witter
FBO Don & Julie Marchman, TTEE
P.O. Box 250 Church Street Station
New York, NY 10008
------------------------------------- -----------------------------------
Alfred & Dolores DeFrancesco
Attn: Neil Woodruff
P.O. Box 605
Gilroy, CA 95021
------------------------------------- -----------------------------------
Wedbush Morgan Securities
Accounting Department
P.O. Box 30014
Los Angeles, CA 90030
------------------------------------- -----------------------------------
Kemper New York Tax-Free Income
------------------------------------- -----------------------------------
NAME PERCENTAGE
------------------------------------- -----------------------------------
ABN Amro Chicago Corp.
Mutual Funds Admin.
208 LaSalle Street
Chicago, IL 60604
------------------------------------- -----------------------------------
National Financial Services Corp.
FBO Carmel & Pauline Grech
200 Liberty Street
New York, NY 10281
------------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner &
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
------------------------------------- -----------------------------------
National Financial Services Corp.
FBO Augustino and Luciana Biondi
200 Liberty Street
New York, NY 10281
------------------------------------- -----------------------------------
45
<PAGE>
------------------------------------- -----------------------------------
PaineWebber
FBO Diana Riklis
1020 Park Avenue
New York, NY 10028
------------------------------------- -----------------------------------
Advest Inc.
90 State House Square
Hartford, CT 06103
------------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner &
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL 07303
------------------------------------- -----------------------------------
46
<PAGE>
Capital Structure
The State Trust was organized under the name "Kemper California Tax-Free Income
Fund" as a business trust under the laws of Massachusetts on October 24, 1985
with a single investment portfolio. Effective January 31, 1986, the Trust
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
California Tax-Free Income Fund, Inc., a Maryland corporation organized in 1983.
On July 27, 1990, the Trust changed its name to "Kemper State Tax-Free Income
Series" and changed the name of its initial portfolio to "Kemper California
Tax-Free Income Fund." The predecessor to the New York Fund, also named "Kemper
New York Tax-Free Income Fund," was organized as a business trust under the laws
of Massachusetts on August 9, 1985. Prior to May 28, 1988, that investment
company was known as "Tax-Free Income Portfolios" and it offered two series of
shares, the National Portfolio and the New York Portfolio. Pursuant to a
reorganization on May 27, 1988, the National Portfolio was terminated and the
New York Portfolio continued as the sole remaining series of Kemper New York
Tax-Free Income Fund, which was reorganized into the New York Fund as a series
of the State Trust on July 27, 1990. Each State Fund is an open-end,
non-diversified Fund.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Funds," all having no par value, which may be divided by the
Board of Trustees into classes of shares. Currently, the State Trust has eight
Funds that offer four classes of shares. These are Class A, Class B and Class C
shares, as well as Class S shares, which have different expenses, and which may
affect performance. The Board of Trustees of either Trust may authorize the
issuance of additional classes and additional Funds if deemed desirable, each
with its own investment objective, policies and restrictions.
Since the Trust may offer multiple Funds, each is known as a "series company."
Shares of each Fund of a Trust have equal noncumulative voting rights except
that Class B and Class C shares have separate and exclusive voting rights with
respect to each Fund's Rule 12b-1 Plan. Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such Fund subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of a Fund. Shares of the Trust are
fully paid and nonassessable when issued, are transferable without restriction
and have no preemptive or conversion rights. The Trust is not required to hold
annual shareholder meetings and do not intend to do so. However, they will hold
special meetings as required or deemed desirable for such purposes as electing
trustees, changing fundamental policies or approving an investment management
agreement. Subject to the Agreement and Declaration of Trust of the Trust,
shareholders may remove trustees. Shareholders will vote by Fund and not in the
aggregate or by class except when voting in the aggregate is required under the
1940 Act, such as for the election of trustees, or when voting by class is
appropriate.
The Trust generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Trust ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which shareholder approval is
required by the 1940 Act; (c) any termination of the Trust, a Fund or a class to
the extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration of Trust (other than amendments changing the name of the Trust,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Trust, or any registration of the Trust with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental
investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) a Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Trust stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Trust has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Declaration of Trust of the Trust provides that the presence at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall constitute a quorum. Thus, a meeting of shareholders
of a Trust could take
47
<PAGE>
place even if less than a majority of the shareholders were represented on its
scheduled date. Shareholders would in such a case be permitted to take action
which does not require a larger vote than a majority of a quorum, such as the
election of trustees and ratification of the selection of independent auditors.
Some matters requiring a larger vote under the Declaration of Trust of a Trust,
such as termination or reorganization of the Trust and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Declaration of Trust of the Trust specifically authorizes the Board of
Trustees to terminate the Trust or any Fund or class by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Trust. The Declaration of Trust of the Trust, however, disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust or the trustees. Moreover, the Declaration of Trust of the
Trust provides for indemnification out of Trust property for all losses and
expenses of any shareholder held personally liable for the obligations of the
Trust and the Trust will be covered by insurance which the trustees consider
adequate to cover foreseeable tort claims. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered by
Scudder Kemper remote and not material, since it is limited to circumstances in
which a disclaimer is inoperative and the Trust itself is unable to meet its
obligations.
48
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
municipal bonds are Aaa, Aa, A and Baa. Municipal bonds rated Aaa are judged to
be of the "best quality." The rating of Aa is assigned to municipal bonds which
are of "high quality by all standards," but as to which margins of protection or
other elements make long-term risks appear somewhat larger than Aaa rated
municipal bonds. The Aaa and Aa rated municipal bonds comprise what are
generally known as "high grade bonds." Municipal bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Municipal
bonds which are rated Baa are considered as medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest coverage and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Municipal bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Municipal
bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Municipal
bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Municipal bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Municipal bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
The four highest ratings of Standard & Poor's Corporation ("S&P") for municipal
bonds are AAA, AA, A and BBB. Municipal bonds rated AAA have the highest rating
assigned by S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in
small degree. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this capacity than for bonds in higher rated categories. Municipal
bonds rated BB, B, CCC, CC or C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. The rating CI is
reserved for income bonds on which no interest is being paid. Bonds rated D are
in default and payment of interest and/or repayment of principal is in arrears.
The four highest ratings of Fitch Investors Service, Inc. ("Fitch") for
municipal bonds are AAA, AA, A and BBB. Municipal bonds rated AAA are considered
to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated AA are
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+. Bonds rated A are considered to
be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. Bonds rated BB are considered
speculative. The obligor's ability to pay interest and repay principal may be
affected over time by adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in satisfying its
debt service requirements. Bonds rated B are considered highly speculative.
While bonds in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue. Bonds rated CCC have certain
identifiable characteristics which, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and economic
environment.
49
<PAGE>
Bonds rated CC are minimally protected. Default in payment of interest and/or
principal seems probable over time. Bonds rated C are in imminent default in
payment of interest or principal. Bonds rated DDD, DD and D are in default on
interest and/or principal payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds, and D represents the lowest potential for recovery.
The four highest ratings of Duff & Phelps Credit Rating Co. ("Duff") for
municipal bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating
assigned by Duff to a debt obligation. They are of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt. Bonds rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions. Bonds rated A have protection factors that are
average but adequate. However, risk factors are more variable and greater in
periods of economic stress. Bonds rated BBB have below average protection
factors but are still considered sufficient for prudent investment. They have
considerable volatility in risk during economic cycles. Bonds rated BB are below
investment grade but deemed likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move up or down frequently
within this category. Bonds rated B are below investment grade and possessing
risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade. Bonds rated CCC are well
below investment grade securities. Considerable uncertainty exists as to timely
payment of principal or interest. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or with
unfavorable company developments. Bonds rated D are in default. The issuer
failed to meet scheduled principal and/or interest payments.
The "debt securities" included in the discussions of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA, AA or A by S&P
or Aaa, Aa or A by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." Corporate debt obligations rated A by S&P are
regarded as "upper medium grade" and have "considerable investment strength, but
are not entirely free from adverse effects of changes in economic and trade
conditions." The Moody's corporate debt ratings of Aaa, Aa and A do not differ
materially from those set forth above for municipal bonds.
Taxable or tax-exempt commercial paper ratings of A-1 or A-2 by S&P and P-1 or
P-2 by Moody's are the highest paper ratings of the respective agencies. The
issuer's earnings, quality of long-term debt, management and industry position
are among the factors considered in assigning such ratings.
Subsequent to its purchase by a Fund, an issue of Municipal Securities or a
temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but KFS will consider
such an event in its determination of whether the Fund should continue to hold
such obligation in its portfolio. To the extent that the ratings accorded by
S&P, Moody's, Fitch or Duff for municipal bonds or temporary investments may
change as a result of changes in such organizations, or changes in their rating
systems, the Fund will attempt to use comparable ratings as standards for its
investments in municipal bonds or temporary investments in accordance with the
investment policies contained herein.
50
<PAGE>
KEMPER STATE TAX -FREE INCOME SERIES
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
-------- --------
<S> <C> <C> <C>
(a) (a)(1) Amended and Restated Agreement and Declaration of Trust is incorporated
by reference to Post-Effective Amendment No. 22 to the Registration
Statement.
(b) By-laws is incorporated by reference to Post-Effective Amendment No. 23
to the Registration Statement.
(c) (c)(1) Written Instrument Establishing and Designating Separate Classes of
Shares is incorporated by reference to Post-Effective Amendment No. 22
to the Registration Statement.
(c)(2) Amended and Restated Written Instrument Establishing and Designating
Separate Classes of Shares is incorporated by reference to
Post-Effective Amendment No. 25 to the Registration Statement.
(d) (d)(1) Investment Management Agreement between the Registrant, on behalf of
Kemper California Tax Free Income Fund, and Scudder Kemper Investments,
Inc., dated September 7, 1998 is incorporated by reference to
Post-Effective Amendment No. 28 to the Registration Statement.
(d)(2) Investment Management Agreement between the Registrant, on behalf of
Kemper Florida Tax Free Income Fund, and Scudder Kemper Investments,
Inc., dated September 7, 1998 is incorporated by reference to
Post-Effective Amendment No. 28 to the Registration Statement.
(d)(3) Investment Management Agreement between the Registrant, on behalf of
Kemper New York Tax Free Income Fund, and Scudder Kemper Investments,
Inc., dated September 7, 1998 is incorporated by reference to
Post-Effective Amendment No. 28 to the Registration Statement.
(d)(4) Investment Management Agreement between the Registrant, on behalf of
Kemper Ohio Tax Free Income Fund, and Scudder Kemper Investments, Inc.,
dated September 7, 1998 is incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement.
(e) (e)(1) Underwriting and Distribution Services Agreement between the Registrant
and Kemper Distributors, Inc., dated September 7, 1998 is incorporated
by reference to Post-Effective Amendment No. 28 to the Registration
Statement.
(e)(2) Selling Group Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement.
(e)(3) Addendum--Selling Group Agreement is incorporated by reference to
Post-Effective Amendment No. 22 to the Registration Statement.
(f) Inapplicable.
3
<PAGE>
(g ) (g)(1) Custody Agreement is incorporated by reference to Post-Effective
Amendment No. 23 to the Registration Statement.
(g)(2) Amendment to Custody Agreement dated March 15, 1999, is incorporated by
reference to Post-Effective Amendment No. 31 to the Registration
Statement.
(g)(3)
Amendment to Custody Agreement dated March 31, 1999, is incorporated by
reference to Post-Effective Amendment No. 31 to the Registration
Statement.
(h) (h)(1) Agency Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement.
(h)(2) Supplement to Agency Agreement is incorporated by reference to
Post-Effective Amendment No. 25 to the Registration Statement.
(h)(3) Administrative Services Agreement is incorporated by reference to
Post-Effective Amendment No. 22 to the Registration Statement.
(h)(4) Amendment to Administrative Services Agreement is incorporated by
reference to Post-Effective Amendment No. 22 to the Registration
Statement.
(h)(5) Assignment and Assumption Agreement is incorporated by reference to
Post-Effective Amendment No. 22 to the Registration Statement.
(h)(6) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper California Tax-Free Income Fund, and Scudder Fund Accounting
Corp., dated December 31, 1997 is incorporated by reference to
Post-Effective Amendment No. 28 to the Registration Statement.
(h)(7) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Florida Tax-Free Income Fund, and Scudder Fund Accounting Corp.,
dated December 31, 1997 is incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement.
(h)(8) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper New York Tax-Free Income Fund, and Scudder Fund Accounting
Corp., dated December 31, 1997 is incorporated by reference to
Post-Effective Amendment No. 28 to the Registration Statement.
(h)(9) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Ohio Tax-Free Income Fund, and Scudder Fund Accounting Corp.,
dated December 31, 1997 is incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement.
(i) Legal Opinion and Consent of Counsel; to be filed by amendment.
(j) Consent of Independent Accountants; to be filed by amendment.
4
<PAGE>
(k) Inapplicable.
(l) Inapplicable.
(m) (m)(1) Rule 12b-1 Plan between the Registrant, on behalf of Kemper California
State Tax-Free Income Fund (Class B shares) and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 27 to the Registration Statement.
(m)(2) Rule 12b-1 Plan between the Registrant, on behalf of Kemper California
State Tax-Free Income Fund, (Class C shares) and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 27 to the Registration Statement.
(m)(3) Rule 12b-1 Plan between the Registrant, on behalf of Kemper Florida
State Tax-Free Income Fund, (Class B shares) and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 27 to the Registration Statement.
(m)(4) Rule 12b-1 Plan between the Registrant, on behalf of Kemper Florida
State Tax-Free Income Fund, (Class C shares) and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 27 to the Registration Statement.
(m)(5) Rule 12b-1 Plan between the Registrant, on behalf of Kemper New York
State Tax-Free Income Fund, (Class B shares) and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 27 to the Registration Statement.
(m)(6) Rule 12b-1 Plan between the Registrant, on behalf of Kemper New York
State Tax-Free Income Fund, (Class C shares) and Kemper Distributors,
Inc., dated August 1, 1998 is incorporated by reference to
Post-Effective Amendment No. 27 to the Registration Statement.
(m)(7) Rule 12b-1 Plan between the Registrant, on behalf of Kemper Ohio State
Tax-Free Income Fund, (Class B shares) and Kemper Distributors, Inc.,
dated August 1, 1998 is incorporated by reference to Post-Effective
Amendment No. 27 to the Registration Statement.
(m)(8) Rule 12b-1 Plan between the Registrant, on behalf of Kemper Ohio State
Tax-Free Income Fund, (Class C shares) and Kemper Distributors, Inc.,
dated August 1, 1998 is incorporated by reference to Post-Effective
Amendment No. 27 to the Registration Statement.
(n) Multi-Distribution System Plan is incorporated by reference to
Post-Effective Amendment No. 25 to the Registration Statement.
(p) (p)(1) Code of Ethics of Scudder Kemper Investments, Inc. and certain of its
subsidiaries, including Kemper Distributors, Inc. and Scudder Investor
Services, Inc., is incorporated by reference to Post-Effective
Amendment No. 32 to the Registration Statement.
(p)(2) Code of Ethics of Kemper State Tax-Free Income Series is incorporated
by reference to Post-Effective Amendment No. 32 to the Registration
Statement.
</TABLE>
5
<PAGE>
Item 24. Persons Controlled By or Under Common Control With Registrant
-------- -------------------------------------------------------------
Inapplicable.
Item 25. Indemnification
-------- ---------------
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the Registrant will indemnify its officers and trustees under certain
circumstances. However, in accordance with Section 17(h) and 17(I) of the
Investment Company Act of 1940 and its own terms, said Article of the Agreement
and Declaration of Trust does not protect any person against any liability to
the Registrant or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.
6
<PAGE>
Item 26. Business and Other Connections of Investment Adviser
-------- ----------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Name Business and Other Connections of Board of Directors of Registrant's Adviser
---- ----------------------------------------------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments, Inc. **
Director and Chairman, Scudder Investments (Luxembourg) S.A. #
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director and Vice President, Scudder Kemper Investments, Inc.**
Vice President, Scudder MAXXUM Company***
Vice President, Scudder, Stevens & Clark Corporation**
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
7
<PAGE>
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial Services,
Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Director, Secretary, Chief Legal Officer and Vice President, Kemper Distributors, Inc.
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Threadneedle International Ltd. oo
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings, Ltd.
</TABLE>
* Two International Place, Boston, MA
@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449
Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
8
<PAGE>
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@@ P.O. Box 309, Upland House, S. Church St.,
Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo 1 South Place 5th floor, London EC2M 2ZS England
ooo One Exchange Square 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon,
Minato-ku, Tokyo 105-0001
x Level 3, 5 Blue Street North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- -----------------------
(a)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper
Funds.
(b)
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C>
Thomas V. Bruns President None
Linda C. Coughlin Director and Vice Chairman None
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Treasurer None
Linda J. Wondrack Vice President and Chief Compliance Officer Vice President
Paula Gaccione Vice President None
Michael E. Harrington Managing Director None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director and Chairman President
Terrence S. McBride Vice President None
Robert Froelich Managing Director None
9
<PAGE>
C. Perry Moore Senior Vice President and Managing Director None
Lorie O'Malley Managing Director None
William F. Glavin Managing Director None
Gary N. Kocher Managing Director None
Susan K. Crenshaw Vice President None
Johnston A. Norris Managing Director and Senior Vice President None
John H. Robison, Jr. Managing Director and Senior Vice President None
Robert J. Guerin Vice President None
Kimberly S. Nassar Vice President None
Scott B. David Vice President None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
-------- --------------------------------
Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, State Street
Bank and Trust Company ("State Street"), 225 Franklin Street, Boston,
Massachusetts 02110 or, in the case of records concerning transfer agency
functions, at the offices of State Street and of the shareholder service agent,
Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105.
Item 29. Management Services
-------- -------------------
Not applicable.
Item 30. Undertakings
-------- ------------
Not applicable.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois, on the 29th day of
November, 2000.
KEMPER STATE TAX-FREE INCOME SERIES
By /s/ Mark S. Casady
-------------------------------
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on November 29, 2000 on behalf of
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thomas W. Littauer November 29, 2000
--------------------------------------
Thomas W. Littauer* Chairman and Trustee
/s/ John W. Ballantine November 29, 2000
--------------------------------------
John W. Ballantine* Trustee
/s/ Lewis A. Burnham November 29, 2000
--------------------------------------
Lewis A. Burnham* Trustee
/s/ Linda C. Coughlin Trustee November 29, 2000
--------------------------------------
Linda C. Coughlin
/s/ Donald L. Dunaway November 29, 2000
--------------------------------------
Donald L. Dunaway* Trustee
/s/ Robert B. Hoffman November 29, 2000
--------------------------------------
Robert B. Hoffman* Trustee
/s/ Donald R. Jones November 29, 2000
--------------------------------------
Donald R. Jones* Trustee
/s/ Shirley D. Peterson November 29, 2000
--------------------------------------
Shirley D. Peterson* Trustee
/s/ William P. Sommers November 29, 2000
--------------------------------------
William P. Sommers* Trustee
<PAGE>
/s/ John R. Hebble November 29, 2000
--------------------------------------
John R. Hebble Treasurer (Principal Financial
and Accounting Officer)
</TABLE>
*By: /s/ Philip J. Collora
---------------------------
Philip J. Collora**
** Attorney-in-fact pursuant to powers of attorney
incorporated by reference to and included with the
signature pages of Post-Effective Amendment No. 27
and Post-Effective Amendment No. 29 to the
Registration Statement
2
<PAGE>
File No. 2-81549
File No. 811-3657
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 33
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 33
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER STATE TAX-FREE INCOME SERIES
11
<PAGE>
KEMPER STATE TAX-FREE INCOME SERIES
EXHIBIT INDEX
12