This combined prospectus sets forth concisely the information about Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund, each a
series of Scudder California Tax Free Trust, an open-end management investment
company, that a prospective investor should know before investing. Please retain
it for future reference.
Shares of the Funds are not insured or guaranteed by the U.S. Government.
Scudder California Tax Free Money Fund seeks to maintain a constant net asset
value of $1.00 per share but there can be no assurance that the stable net asset
value will be maintained.
If you require more detailed information, a Statement of Additional Information
for the Funds dated August 1, 1995, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into this prospectus, has been
filed with the Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents--see page 5.
Scudder California
Tax Free Money Fund
- -------------------
Scudder California
Tax Free Fund
Prospectus
August 1, 1995
Two pure no-load(TM) (no sales charges) mutual fund series which seek to provide
double tax-free income, exempt from both California state personal income tax
and regular federal income tax.
Expense information
How to compare a Scudder pure no-load(TM) fund This information is designed to
help you understand the various costs and expenses of investing in Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund (the
"Funds"). By reviewing this table and those in other mutual funds' prospectuses,
you can compare each Fund's fees and expenses with those of other funds. With
Scudder's pure no-load(TM) funds, you pay no commissions to purchase or redeem
shares, or to exchange from one fund to another. As a result, all of your
investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged
directly to your individual account in either Fund
for various transactions.
Scudder California Scudder California
Tax Free Money Fund Tax Free Fund
Sales commissions to purchase
shares (sales load) NONE NONE
Commissions to reit dividends NONE NONE
Redemption fees NONE * NONE *
Fees to exchange ss NONE NONE
2) Annual Fund operating expenses:
Expenses paid by either Fund before it distributes its
net investment income, expressed as a percentage of its
average daily net assets for the fiscal year ended March 31, 1995.
Investment management fees 0.26%** 0.62%
12b-1 fees NONE NONE
Other expenses 0.34%** 0.18%
Total Fund operating expenenses 0.60%** 0.80%
Example
Based on the levels of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by each Fund before it distributes its
net investment income to shareholders. (As noted above, the Funds have no
redemption fees of any kind.)
One year $ 6 $ 8
Three years 19 26
Five years 33 44
Ten years 75 99
See "Fund organization--Investment adviser" for further information about the
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Funds, or by Write-A-Check for
Scudder California Tax Free Money Fund. If you wish to receive redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "Transaction information--Redeeming shares."
** Until July 31, 1996, the Adviser has agreed to waive a portion of its
fee for Scudder California Tax Free Money Fund to the extent necessary so
that the total annualized expenses of the Fund do not exceed 0.60% of
average daily net assets. If the Adviser had not done so, Fund expenses
would have been: investment management fee 0.50%, other expenses 0.34% and
total operating expenses 0.84% for the fiscal year ended March 31, 1995. To
the extent that expenses fall below 0.60% during the fiscal year, the
Adviser reserves the right to recoup, during the fiscal year incurred,
amounts reimbursed or waived during the period, but only to the extent that
the Fund's expenses for that period do not exceed 0.60%.
2
<PAGE>
Financial highlights
Scudder California Tax Free Money Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited
financial statements.
If you would like more detailed information concerning the Fund's performance,
a complete portfolio listing and audited financial statements are available in
the Fund's Annual Report dated March 31, 1995 and may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the Period
May 28, 1987
(Commencement
Years Ended March 31, of operations) to
------------------------------------------------------------- March 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net investment income (a) .027 .019 .023 .035 .047 .052 .049 .035
Distributions from net
investment income (.027) (.019) (.023) (.035) (.047) (.052) (.049) (.035)
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Total Return (%) (b) 2.72 1.92 2.35 3.54 4.79 5.35 5.04 3.86**
Ratios and Supplemental Data
Net assets, end of period
($ millions) 64 72 56 58 64 65 64 53
Ratio of operating expenses, net
to average daily net
assets (%) (a) .60 .60 .60 .60 .65 .75 .67 .45*
Ratio of net investment income to
average daily net assets (%) 2.68 1.90 2.33 3.50 4.68 5.22 4.98 4.41*
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .002
Reflects a per share amount
of management fee not
imposed by the Adviser of $.002 $ .003 $ .003 $ .003 $ .003 $.001 $ .002 $ .004
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%) .84 .90 .86 .88 .92 .90 .84 1.32*
(b) Returns are higher due to maintenance of the Fund's expenses.
*Annualized
**Not annualized
</TABLE>
3
<PAGE>
Financial highlights (cont'd)
Scudder California Tax Free Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited
financial statements.
If you would like more detailed information concerning
the Fund's performance, a complete portfolio listing and audited financial
statements are available in the Fund's Annual Report dated March 31, 1995 and
may be obtained without charge by writing or calling Scudder Investor
Services, Inc.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period....... $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18 $10.95 $ 9.54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income..... .51 .53 .59 .61 .63 .65 .68 .69 .71 .73
Net realized and
unrealized gain
(loss) on investment
transactions............ .14 (.35) .94 .47 .21 .22 .27 (.93) .53 1.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ .65 .18 1.53 1.08 .84 .87 .95 (.24) 1.24 2.14
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income.................. (.51) (.53) (.59) (.61) (.63) (.65) (.68) (.69) (.71) (.73)
From net realized gains
on investment........... (.09) (.63) (.49) (.28) (.09) (.19) -- (.26) (.30) --
In excess of net
realized gains.......... -- (.05) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.60) (1.21) (1.08) (.89) (.72) (.84) (.68) (.95) (1.01) (.73)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................... $10.07 $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18 $10.95
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)............ 6.75 1.30 15.13 10.74 8.53 8.62 9.80 (1.70) 12.11 23.19
RATIO AND SUPPLEMENTAL
DATA
Net assets, end of period
($ millions).............. 294 325 309 242 208 193 171 153 195 133
Ratio of operating
expenses, net to
average daily net
assets (%)................ .80 .78 .79 .81 .84 .83 .89 .88 .84 .88
Ratio of net investment
income to average daily
net assets (%)............ 5.18 4.85 5.42 5.79 6.13 6.23 6.71 6.95 6.55 7.11
Portfolio turnover rate..... 87.3 126.5 208.6 143.0 170.6 70.4 158.9 52.3 68.0 92.6
</TABLE>
4
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $90 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less
costly. It includes money market, tax free, income and growth funds as well as
IRAs, 401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
The Funds
o seek to provide double tax-free income, exempt from both California
state personal income tax and regular federal income tax
o active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
o dividends declared daily and paid monthly
Scudder California Tax Free Money Fund
o seeks to maintain a constant share price of $1.00 and investment in
high quality, short-term municipal securities tax-exempt in California
Scudder California Tax Free Fund
o invests primarily in long-term investment-grade municipal securities
tax-exempt in California
Contents
Why invest in these funds? 6
Summary of important features 7
Tax-exempt vs. taxable income 8
Scudder California Tax Free Money Fund 9
Scudder California Tax Free Fund 10
Additional information about policies
and investments 11
Purchases 14
Exchanges and redemptions 15
Distribution and performance information 18
Fund organization 19
Transaction information 20
Shareholder benefits 24
Trustees and Officers 26
Investment products and services 27
How to contact Scudder Back cover
5
<PAGE>
Why invest in these funds?
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund (the
"Funds") are non-diversified and diversified series, respectively, of Scudder
California Tax Free Trust and are designed for California residents seeking
income exempt from both state and regular federal income tax. Because these
Funds are intended for investors subject to California state personal income and
regular federal income taxes, they may not be appropriate for all investors and
are not available in all states.
Tax-free income
As illustrated in the chart "Tax-exempt vs. taxable income," depending on your
tax bracket and individual situation, you may earn a substantially higher
after-tax return from these Funds than from comparable investments that pay
income subject to both California state personal and regular federal income tax.
For example, if your federal marginal tax rate is 36% and your California
marginal tax rate is 10%, your effective combined marginal tax rate is 42.40%.
Thus, you would need to earn a taxable return of 6.22% to receive after-tax
income equal to the 3.58% tax-free yield provided by Scudder California Tax Free
Money Fund for the seven-day period ended March 31, 1995, or earn a taxable
return of 8.73% to receive after-tax income equal to the 5.03% tax-free yield
provided by Scudder California Tax Free Fund for the 30-day period ended March
31, 1995. In other words, it would be necessary to earn $1,736 from a taxable
investment to equal $1,000 of tax-free income you receive from either Fund. The
yield levels of tax-free and taxable investments change continuously. Before
investing in either Fund, you should compare its yield to the after-tax yield
you would receive from a comparable investment paying taxable income. For
up-to-date yield information on either Fund, shareholders can call SAIL, Scudder
Automated Information Line, for toll-free information at any time.
Investment characteristics of each Fund
The Funds are income-oriented portfolios advised by Scudder, Stevens & Clark,
Inc. (the "Adviser"). Each Fund seeks to provide income free from both
California state personal income and regular federal income tax. Each Fund
normally invests at least 80% of its net assets in California municipal
securities. The two Funds, however, have different investment objectives and
characteristics. The two Funds' prospectuses are presented together so you can
understand their important differences and decide which Fund or combination of
the two is most suitable for your needs.
Scudder California Tax Free Money Fund seeks stability of capital and the
maintenance of a $1.00 net asset value per share. Scudder California Tax Free
Fund ordinarily provides a higher, more stable income stream, but its net asset
value per share fluctuates with market changes. As a result of these
differences, the average portfolio maturities of the Funds are different.
Scudder California Tax Free Money Fund invests primarily in short-term municipal
obligations (notes and bonds) with individual remaining maturities of 397
calendar days or less. The weighted average maturity of the portfolio is 90 days
or less. Scudder California Tax Free Fund has flexible investment policies
regarding maturity but normally invests primarily in long-term municipal bonds.
The yield and the potential for price fluctuation are generally greater, the
greater the maturity of the municipal security. Other factors affecting the
yield and price variability include the absolute level of interest rates, the
relationship among short-, medium- and long-term interest rates, the quality of
each Fund's investments and each Fund's expenses.
6
<PAGE>
Except as otherwise indicated, each Fund's investment objectives and
policies are not fundamental and may be changed without a vote of shareholders.
Shareholders will receive written notice of any changes in either Fund's
objective. If there is a change in investment objective, shareholders should
consider whether that Fund remains an appropriate investment in light of their
then current financial position and needs. There can be no assurance that either
Fund's objectives will be met. In addition, the Funds offer all the benefits of
the Scudder Family of Funds. Scudder, Stevens & Clark, Inc. manages a diverse
family of pure no-load(TM) funds and provides a wide range of services to help
investors meet their investment needs. Please refer to "Investment products and
services" for additional information.
Summary of important features
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Investment Investments Maturity Quality Dividends
objectives
and characteristics
<S> <C> <C> <C> <C> <C>
Scudder o price stability o short-term o average maturity o 100% of o declared daily
California Tax California of 90 days or investments rated and paid
Free Money Fund o income exempt from municipal less; within top two monthly
both California securities no single quality ratings
state personal investment or judged to be o option to
income tax and maturity longer of comparable receive in
regular federal than 397 quality cash or
income tax calendar days reinvest in
additional
shares
Scudder o prices will o primarily o primarily o 100% of o declared daily
California Tax fluctuate with long-term long-term bonds investments rated and paid
Free Fund changes in interest California within top six monthly
rates municipal quality ratings
bonds or judged to be o option to
o income exempt from of comparable receive in
both California quality cash or
state personal reinvest in
income tax and additional
regular federal shares
income tax
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Tax-exempt vs. taxable income
- ------------------------------------------------------------------------------------------------------------------------
Tax Free Yields and Corresponding Taxable Equivalents: The table below shows
California taxpayers what an investor would have to earn from a comparable
taxable investment to equal the Scudder California Tax Free Money Fund and the
Scudder California Tax Free Fund's double tax free yield. Today, many investors
may find that regular federal and California state personal income tax rates
make either Fund an attractive alternative to investments paying taxable income.
COMBINED MARGINAL TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7% AND
TAX 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
1994 TAXABLE INCOME: RATE: 5% 7% 9%
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
$22,751-24,519 32.32% 7.39% 10.34% 13.30%
24,520-30,987 33.76 7.55 10.57 13.59
30,988-55,100 34.70 7.66 10.72 13.78
55,101-107,464 37.42 7.99 11.19 14.38
107,465-115,000 37.90 8.05 11.27 14.49
115,001-214,929 42.40 8.68 12.15 15.63
214,930-250,000 43.04 8.78 12.29 15.80
OVER $250,000 46.24 9.30 13.02 16.74
$38,000-49,038 32.32% 7.39% 10.34% 13.30%
49,039-61,974 33.76 7.55 10.57 13.59
61,975-91,850 34.70 7.66 10.72 13.78
91,851-140,000 37.42 7.99 11.19 14.38
140,001-214,928 41.95 8.61 12.06 15.50
214,929-250,000 42.40 8.68 12.15 15.63
250,001-429,858 45.64 9.20 12.88 16.56
OVER $429,858 46.24 9.30 13.02 16.74
* Combined marginal tax rates are adjusted for the deductibility of state taxes. These illustrations assume a marginal
federal income tax rate of 28% to 39.6% and that the federal alternative minimum tax is not applicable. Upper income
individuals may be subject to an effective federal income tax rate in excess of the applicable marginal rate as a
result of the phase-out of personal exemptions and itemized deductions made permanent by the Revenue Reconciliation
Act of 1993. Individuals subject to these phase-out provisions would have to invest in taxable securities with a
yield in excess of those shown on the table in order to achieve an after-tax
yield equivalent to the yield on a comparable tax-exempt security.
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
Scudder California Tax Free
Money Fund
Investment objectives and policies
Scudder California Tax Free Money Fund seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while providing
California taxpayers income exempt from both California personal and regular
federal income tax. The Fund is a professionally managed portfolio of high
quality, short-term California municipal securities. All of the Fund's
investments are high quality, have a remaining maturity of 397 calendar days or
less and have minimal credit risk as determined by the Adviser. The weighted
average maturity of the Fund's portfolio is 90 days or less.
Quality
All of the Fund's municipal securities must meet certain quality criteria at the
time of purchase. Generally, the Fund may purchase only securities which are
rated, or issued by an issuer rated, within the two highest quality ratings of
two or more of the following rating agencies: Moody's Investors Service, Inc.
("Moody's") (Aaa and Aa, MIG-1 and MIG-2, and P1), Standard & Poor's ("S&P")
(AAA and AA, SP1+ and SP1, A1+ and A1), and Fitch Investors Service, Inc.
("Fitch") (AAA and AA, F1+, F1 and F2). Where only one rating agency has rated a
security (or its issuer), the Fund may purchase that security as long as the
rating falls within the categories described above. Where a security (or its
issuer) is unrated, the Fund may purchase that security if, in the judgement of
the Adviser, it is comparable in quality to securities described above. All of
the securities in which the Fund may invest are dollar-denominated and must meet
credit standards applied by the Adviser pursuant to procedures established by
the Trustees. Should an issue of municipal securities cease to be rated or if
its rating is reduced below the minimum required for purchase by a money market
fund, the Adviser will dispose of any such security unless the Trustees of the
Fund determine that such disposal would not be in the best interests of the
Fund.
Investments
The Fund invests in municipal securities of issuers located in California and
other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
the income from these obligations is exempt from both California personal income
tax and regular federal income tax ("California municipal securities"). These
securities include general obligation and revenue bonds and notes of issuers
located in California and of other qualifying issuers. General obligation bonds
and notes are secured by the issuer's pledge of its full faith, credit and
taxing power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source. The Fund may invest in municipal notes, which are
generally used to provide short-term capital needs, and have maturities of one
year or less. Municipal notes include tax anticipation notes, revenue
anticipation notes, bond anticipation notes and construction loan notes. The
Fund may also invest in municipal bonds with remaining maturities of 397
calendar days or less.
Ordinarily, the Fund expects that 100% of its portfolio securities will be
California municipal securities. The Fund may also, for temporary defensive
purposes, hold cash or invest its assets in short-term taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities and enter into repurchase agreements and reverse repurchase
agreements, which may involve certain expenses and risks, including credit
risks. The Fund may invest in variable rate demand instruments. These securities
and techniques are not expected to comprise a major portion of the Fund's
investments.
9
<PAGE>
See "Additional information about policies and investments" for more information
about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local
income taxes.
Scudder California Tax Free Fund
Investment objective and policies
Scudder California Tax Free Fund seeks to provide California taxpayers with
income exempt from both California personal income and regular federal income
tax. The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
The Adviser believes that investment results can be enhanced by active
professional management. Professional management distinguishes the Fund from
unit investment trusts, which cannot be actively managed.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or BBB by S&P or Fitch, or unrated
securities judged by the Adviser to be of equivalent quality, or securities
issued or guaranteed by the U.S. Government. The Fund may also invest up to 25%
of its total assets in fixed-income securities rated below investment- grade,
that is, rated below Baa by Moody's or below BBB by S&P or Fitch, or in unrated
securities considered to be of equivalent quality as determined by the Adviser.
The Fund may not invest in fixed-income securities rated below B by Moody's, S&P
or Fitch, or their equivalent.
The Fund expects to invest principally in securities rated A or better by
Moody's, S&P or Fitch or unrated securities judged by the Adviser to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
During the year ended March 31, 1995, the average monthly dollar-weighted
market value of the bonds in the Fund's portfolio were as follows: 50% rated
AAA, 10% AA, 31% A and 9% BBB. The bonds are rated by Moody's, S&P or Fitch, or
of equivalent quality as determined by the Adviser.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields than investment-grade bonds in the past, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
Investments
The Fund invests in municipal securities of issuers located in California and
other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
the income from these obligations is exempt from both California personal income
tax and regular federal income tax ("California municipal securities"). The Fund
may invest in municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued. These securities
include general obligation and revenue bonds, industrial development and
10
<PAGE>
pollution control bonds of issuers located in California. The Fund may invest in
municipal notes, which are generally used to provide short-term capital needs
and have maturities of one year or less. Municipal notes include tax
anticipation notes, revenue anticipation notes, bond anticipation notes and
construction loan notes. General obligation bonds and notes are secured by the
issuer's pledge of its full faith, credit and taxing power for payment of
principal and interest. Revenue bonds and notes are generally paid from the
revenues of a particular facility, a specific excise tax or other revenue
source.
Under normal market conditions, the Fund expects to invest principally in
California municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in California municipal
securities with short- and medium-term maturities.
The Fund may also invest up to 20% of its total assets in municipal securities
the interest income from which is taxable or subject to the alternative minimum
tax ("AMT" bonds). Fund distributions from interest on certain municipal
securities subject to the alternative minimum tax, such as private activity
bonds, will be a preference item for purposes of calculating individual and
corporate alternative minimum taxes, depending upon investors' particular
situations. In addition, state and local taxes may apply, depending upon your
state and local tax laws.
Ordinarily, the Fund expects 100% of its portfolio securities to be
California municipal securities. The Fund may also, for temporary defensive
purposes, hold cash or invest its assets in taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities and enter into repurchase agreements and reverse repurchase
agreements, which may involve certain expenses and risks, including credit
risks. The Fund may also invest in variable rate demand instruments. These
securities and techniques are not expected to comprise a major portion of the
Fund's investments. The Fund may also utilize various other strategic
transactions. See "Additional information about policies and investments" for
more information about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local
income taxes.
Additional information about policies and investments
Investment restrictions
Each Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Funds'
investment risk.
Each Fund may not borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse repurchase
agreements. Each Fund may not make loans except through the lending of portfolio
securities, the purchase of debt securities or through repurchase agreements.
Scudder California Tax Free Money Fund is a non-diversified fund (except to the
extent diversification is required for federal income tax purposes). Scudder
California Tax Free Fund is a diversified fund.
Each Fund may invest more than 25% of its assets in industrial development or
other private activity bonds. For purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, all such bonds
ultimately payable by companies within the same industry will be considered as
if they were issued by issuers in the same industry.
Each Fund normally invests at least 80% of its net assets in California
municipal securities. When the Adviser determines that market conditions
11
<PAGE>
warrant, each Fund may, for temporary defensive purposes, invest more than 20%
of its net assets in taxable securities.
In addition, as a matter of nonfundamental policy, each Fund may not invest more
than 10% of its net assets, in the aggregate, in securities which are not
readily marketable, restricted securities and in repurchase agreements maturing
in more than seven days. Each Fund may not invest more than 5% of its total
assets in restricted securities. Neither Fund may invest more than 25% of its
total assets in California municipal securities secured by revenue from health
facilities, toll roads, ports and airports, nor invest in nonpublicly offered
securities.
In addition, up to 20% of each Fund's net assets may be held in cash or invested
in short-term taxable investments, including repurchase agreements, U.S.
Government and other money market instruments and in California municipal
securities whose interest income is specifically treated as a tax preference
item under the individual alternative minimum tax.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Funds' Statement of Additional
Information.
Investing in California
Each Fund is more susceptible to factors adversely affecting issuers of
California municipal securities than are comparable municipal bond funds that do
not emphasize these issuers to this degree. While the California economy
continues to show a slight improvement from fiscal 1994, California continues to
experience some financial difficulties. On July 15, 1994, Moody's lowered
California's general obligation bond ratings from Aa to A1, citing the State's
deteriorating financial position. Also on July 15, 1994, S&P reduced the State's
general obligation bond ratings from A+ to A. For additional information about
the California economy, see the Funds' Statement of Additional Information dated
August 1, 1995.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, each
Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, a Fund acquires securities,
subject to the seller's agreement to repurchase them at a specified time and
price. Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, each Fund may enter into "stand-by commitments"
permitting them to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
Each Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals (not exceeding 397 calendar days in the case of Scudder
California Tax Free Money Fund) to tender (or "put") its bonds to the
institution and receive the face value thereof. These third party puts are
available in several different forms, may be represented by custodial receipts
or trust certificates and may be combined with other features such as interest
rate swaps.
12
<PAGE>
Variable rate demand instruments
Each Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit each Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
Scudder California Tax Free Fund may invest in municipal lease obligations and
participation interests in such obligations. These obligations, which may take
the form of a lease, an installment purchase contract or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the Fund will
not hold such obligations directly, but will purchase a certificate of
participation or other participation interest in a municipal obligation from a
bank or other financial intermediary. A participation interest gives the Fund a
proportionate interest in the underlying obligation.
Indexed securities
Scudder California Tax Free Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). The interest rate or (unlike
most fixed-income securities) the principal amount payable at maturity of an
indexed security may be increased or decreased, depending on changes in the
value of the reference instrument.
Strategic Transactions and derivatives
Scudder California Tax Free Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements), to manage the
effective maturity or duration of the Fund's portfolio, or to enhance potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, Scudder California
Tax Free Fund 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 financial futures contracts and options thereon,
and enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's 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 the 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
(Continued on page 16)
13
<PAGE>
Purchases
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
<S> <C> <C> <C>
Make checks payable o By Mail Send your completed and signed application and check
to "The Scudder
Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052
o By Wire Please see Transaction information--Purchasing shares-- By
wire following these tables for details, including the ABA wire
transfer number. Then call 1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
Make checks payable o By Mail Send a check with a Scudder investment slip, or with a letter of
to "The Scudder instruction including your account number and the
Funds." complete Fund name, to the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire following these tables for details, including
the ABA wire transfer number.
o In Person Visit one of our Funds Centers to make an additional
investment in your Scudder fund account. Funds
Center locations are listed under Shareholder benefits.
o By Automatic You may arrange to make investments on a
Investment Plan regular basis through automatic
($50 minimum) deductions from your bank checking account. Please call
1-800-225-5163 for more information and an
enrollment form.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Exchanges and redemptions
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Exchanging shares Minimum investments: $1,000 to establish a new account; $100 to exchange among
existing accounts
<S> <C> <C>
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime telephone
number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM),
Scudder's Automated Information Line, call 1-800-343-2890
(24 hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to $50,000
sent to your address of record.
o By "Write- For Scudder California Tax Free Money Fund, you may redeem
A-Check" shares by writing checks against your account balance as often
as you like for at least $100, but not more than $5,000,000.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.
A signature guarantee is required for redemptions over $50,000. See Transaction
information--Redeeming shares following these tables.
o By Automatic You may arrange to receive automatic cash payments periodically if the value of
Withdrawal Plan your account is $10,000 or more. Call 1-800-225-5163 for more information and
an enrollment form.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
(Continued from page 13)
Strategic Transaction is a function of numerous variables including market
conditions. The ability of Scudder California Tax Free Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes. Please refer to "Risk factors--Strategic
Transactions and derivatives" for more information.
Risk factors
The Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Funds may use from time to time.
Non-diversified investment company. As a "non-diversified" investment company,
Scudder California Tax Free Money Fund may invest a greater proportion of its
assets in the securities of a smaller number of issuers. Investment in the Fund
may involve greater risk than investment in a diversified fund.
Investing in California. If either California or any of its local governmental
entities were to be unable to meet its financial obligations, the income derived
by each Fund, its net asset value or liquidity and the ability to preserve or
realize appreciation of each Fund's capital could be adversely affected.
In 1978, California passed Proposition 13 limiting the level of property taxes.
In 1988, California passed Proposition 98 guaranteeing public schools a minimum
share of State revenues. These propositions and subsequent legislation may
affect the State's creditworthiness in the future. See "Investing in California"
in the Funds' Statement of Additional Information for further details about the
risks of investing in California obligations.
Debt securities. Scudder California Tax Free Fund may invest in securities
rated below Baa by Moody's or BBB by S&P or Fitch. Moody's considers bonds it
rates Baa to have speculative elements as well as investment-grade
characteristics. Securities rated below investment-grade are commonly referred
to as "junk bonds" and involve greater price volatility and higher degrees of
speculation with respect to the payment of principal and interest than higher
quality fixed-income securities. The market prices of such lower rated debt
securities may decline significantly in periods of general economic difficulty.
In addition, the trading market for these securities is generally less liquid
than for higher rated securities and the Fund may have difficulty disposing of
these securities at the time it wishes to do so. The lack of a liquid secondary
market for certain securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing its portfolio and
calculating its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.
16
<PAGE>
Third party puts. In connection with third party puts, the financial institution
granting the option does not provide credit enhancement, and typically if there
is a default on or significant downgrading of the bond or a loss of its
tax-exempt status the put option will terminate automatically, the risk of the
Fund will be that of holding a long-term bond and, in the case of the Scudder
California Tax Free Money Fund, the weighted average maturity of the Fund's
portfolio would be adversely affected.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Fund. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property. For more information,
please refer to the Funds' Statement of Additional Information.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the 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, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all.
Although the use of futures contracts 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.
17
<PAGE>
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. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Funds' Statement of
Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. An additional distribution may be made within three
months of each Fund's fiscal year end, if necessary. According to preference,
shareholders may receive distributions in cash or have them reinvested in
additional shares of the Funds.
Distributions derived from interest on California municipal securities are
not subject to California state personal income taxes or to regular federal
income taxes, except for the possible applicability of the federal alternative
minimum tax. Interest on obligations of Puerto Rico and other U.S. possessions
may also be distributed as dividends exempt from California state personal
income taxes. Other distributions are generally taxable to shareholders for
California state personal income tax purposes. For federal income tax purposes,
a portion of each Fund's income may be taxable to shareholders as ordinary
income. Long-term capital gains distributions, if any, are taxable as long-term
capital gains for federal and California state personal income tax purposes
regardless of the length of time shareholders have owned their shares.
Short-term capital gains and any other taxable income distributions are taxable
as ordinary income. Distributions of tax-exempt income are taken into
consideration in computing the portion, if any, of Social Security and railroad
retirement benefits subject to federal and, in some cases, state taxes.
Each Fund ordinarily provides income that is 100% free from California state
personal income and regular federal income taxes. However, income from
repurchase agreements and gains from certain Strategic Transactions are taxable.
Moreover, dividends paid to shareholders subject to California state franchise
or corporate income taxes may be taxed as ordinary dividends for the purposes of
such taxes notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Some of a Fund's interest income may
be treated as a tax preference item that may subject an individual investor to
liability (or increased liability) under the alternative minimum tax, depending
upon an investor's particular situation. However, at least 80% of each Fund's
net assets will normally be invested in California municipal securities whose
interest income is not treated as a tax preference item under the individual
alternative minimum tax. Tax-exempt income may also subject a corporate investor
to liability (or increased liability) under the corporate alternative minimum
tax.
Each Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of each year.
Performance information
From time to time, quotations of the Funds' performance may be included in
advertisements, sales literature, or shareholder reports.
18
<PAGE>
All performance figures are historical, show the performance of a hypothetical
investment and are not intended to indicate future performance. The "yield" of
Scudder California Tax Free Money Fund refers to income generated by an
investment in the Fund over a specified seven-day period. The "SEC yield" of
Scudder California Tax Free Fund is an annualized expression of the net income
generated by the Fund over a specified 30-day (one month) period, as a
percentage of the Fund's share price on the last day of that period. This yield
is calculated according to methods required by the Securities and Exchange
Commission (the "SEC"), and therefore may not equate to the level of income paid
to shareholders. The "effective yield" of Scudder California Tax Free Money Fund
is expressed similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested and will reflect the effects of
compounding. Each Fund's "tax-equivalent yield" is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of each Fund's yield, assuming certain tax
brackets for a Fund shareholder. Yields are expressed as annualized percentages.
"Total return" is the change in value of an investment in each Fund for a
specified period. The "average annual total return" of each Fund is the average
annual compound rate of return of an investment in the Fund assuming the
investment has been held for one year, five years, ten years and the life of the
Fund. (If a Fund has not been in operation for at least ten years, the life of
the Fund is used where applicable.) "Cumulative total return" represents the
cumulative change in value of an investment in each Fund for various periods.
All types of total return calculations assume that all dividends and capital
gains distributions during the period were reinvested in shares of the Fund.
Performance will vary based upon, among other things, changes in market
conditions and the level of each Fund's expenses.
Fund organization
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund are
series of Scudder California Tax Free Trust (the "Trust"), an open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). The Trust was organized as a Massachusetts business trust
in May 1983. The Funds' activities are supervised by the Trust's Board of
Trustees. Shareholders have one vote for each share held on matters on which
they are entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment advisory contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
The prospectuses of both Funds are combined in this prospectus. Each Fund offers
only its own shares, yet it is possible that a Fund might become liable for a
misstatement or omission in the prospectus of the other Fund. The Trustees of
the Trust have considered this and approved the use of a combined prospectus.
Investment adviser
Each Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage its daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Trust under
Massachusetts law.
For the fiscal year ended March 31, 1995, the Adviser received monthly an
investment management fee of 0.62% of Scudder California Tax Free Fund's average
daily net assets.
19
<PAGE>
The fee is graduated so that increases in the Fund's net assets may result in a
lower fee and decreases in the Fund's net assets may result in a higher fee.
The fee payable under Scudder California Tax Free Money Fund's Investment
Management Agreement is equal to an annual rate of 0.50% of the Fund's average
daily net assets. The Adviser has agreed to maintain the annualized expenses of
the Fund at not more than 0.60% of the average daily net assets of the Fund
until July 31, 1996.
For the fiscal year ended March 31, 1995, the Adviser received monthly an
investment management fee of 0.26% of Scudder California Tax Free Money Fund's
average daily net assets on an annual basis.
Each Fund's management fee is payable monthly, provided that a Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of a Fund and unpaid. All of a
Fund's expenses are paid out of gross investment income. Shareholders pay no
direct charges or fees for investment or administrative services.
Scudder, Stevens & Clark, Inc. is located at Two International Place,
Boston, Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
wholly-owned subsidiary of the Adviser, is the transfer, shareholder servicing
and dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a wholly-owned subsidiary of the Adviser,
is the Funds' principal underwriter. Scudder Investor Services, Inc. confirms,
as agent, all purchases of shares of the Funds. Scudder Investor Relations is a
telephone information service provided by Scudder Investor Services, Inc.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Fund accounting agent
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
is responsible for determining the daily net asset value per share and
maintaining the general accounting records of the Funds.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent in Boston receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. Checks must be drawn on or payable through a U.S. bank. If
you purchase shares by check and redeem them within seven business days of
purchase, the Fund may hold redemption proceeds until the purchase check has
cleared. If you purchase shares by federal funds wire, you may avoid this delay.
Redemption or exchange requests by telephone or by "Write-A-Check" in the case
of Scudder California Tax Free Money Fund, prior to the expiration of the
seven-day period will not be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent in Boston. Accounts cannot
20
<PAGE>
be opened without a completed, signed application and a Scudder fund account
number. Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. Your new account will have the same registration and address as
your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
Each Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If
you elected telephone redemption to your bank on your application, you can call
to request that federal funds be sent to your authorized bank account. If you
did not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested.
If your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
21
<PAGE>
By "Write-A-Check." You may redeem shares of Scudder California Tax Free Money
Fund by writing checks against your account balance for at least $100. Your Fund
investments will continue to earn dividends until your check is presented to the
Fund for payment.
Checks will be returned by the Funds' transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check, because the exact balance at the time the check clears will not be
known when the check is written.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. Each Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share for
Scudder California Tax Free Money Fund as of twelve o'clock noon and as of the
close of regular trading on the New York Stock Exchange (the "Exchange"),
normally 4 p.m. eastern time, on each day the Exchange is open for trading. For
Scudder California Tax Free Fund, Scudder Fund Accounting Corporation determines
net asset value per share once a day as of the close of regular trading on the
Exchange. Net asset value per share is calculated by dividing the value of total
Fund assets, less all liabilities, by the total number of shares outstanding. In
calculating the net asset value per share, Scudder California Tax Free Fund uses
the current market value of the securities, and Scudder California Tax Free
Money Fund uses the amortized cost value.
Processing time
All purchase and redemption requests must be received in good order by the
Funds' transfer agent in Boston. For Scudder California Tax Free Money Fund,
purchases made by wire and received by the Funds' transfer agent before noon on
any business day are executed at noon on that day and begin earning income the
same day. Those made by wire between noon and the close of regular trading on
the Exchange on any business day are executed at the close of trading the same
day and begin earning income the next business day. Purchases made by check are
executed on the day the check is received in good order by the Funds' transfer
agent in Boston and begin earning income on the next business day. Redemption
requests received in good order by the Funds' transfer agent between noon and
the close of regular trading on the Exchange are executed at the net asset value
calculated at the close of regular trading on that day and will earn a dividend
on the redeemed shares that day. If a redemption request for Scudder California
Tax Free Money Fund is received by noon, proceeds will normally be wired that
day, if requested by the shareholder, but no dividend will be earned on the
redeemed shares on that day.
For Scudder California Tax Free Fund, those requests received by the close of
regular trading on the Exchange are executed at the net asset value per share
calculated at the close of trading that day. Purchase and redemption requests
received after the close of regular trading on the Exchange will be executed the
22
<PAGE>
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
business day. Redeemed shares will earn income on the day on which the
redemption request is executed.
If you wish to make a purchase of $500,000 or more you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Short-term trading
Purchases and sales of Scudder California Tax Free Fund should be made for
long-term investment purposes only. The Fund and Scudder Investor Services, Inc.
each reserves the right to restrict purchases of Fund shares (including
exchanges) when a pattern of frequent purchases and sales made in response to
short-term fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares of Scudder California Tax Free Fund, including an
exchange into another Scudder fund, is a sale of shares and may result in a gain
or loss for income tax purposes (although no gain or loss will be realized in
the case of a redemption or exchange of shares of Scudder California Tax Free
Money Fund if it maintains a constant net asset value per share).
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires each Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Each Fund reserves the right, following
60 days' written notice to shareholders, to redeem all shares in sub-minimum
accounts, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. Reductions in value
that result solely from market activity will not trigger an involuntary
redemption. Each Fund will mail the proceeds of the redeemed account to the
shareholder. The shareholder may restore the share balance to $1,000 or more
during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
23
<PAGE>
Shareholders benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
A team approach to investing
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund are
each managed by a team of Scudder investment professionals who each play an
important role in the Funds' management process. Team members work together to
develop investment strategies and select securities for the Funds' portfolios.
They are supported by Scudder's large staff of economists, research analysts,
traders, and other investment specialists. We believe our team approach benefits
the Funds' investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
Rebecca L. Wilson is Lead Portfolio Manager for Scudder California Tax Free
Money Fund and contributes nine years of experience in municipal investing and
research. Ms. Wilson assumed responsibility for the Fund in 1987 after joining
Scudder in 1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987
and has spent 11 years working with short-term fixed-income investments.
Scudder California Tax Free Fund's Lead Portfolio Manager Jeremy L. Ragus has
had responsibility for the Fund's day-to-day operations since he joined Scudder
in 1990. Mr. Ragus has 14 years of experience in municipal investing. Donald C.
Carleton, Portfolio Manager, has 26 years of investment management experience
and has worked on the Fund's team since he arrived at Scudder in 1983.
SAIL(TM)--Scudder Automated Information Line
For touchtone access to account information, prices and yields, or to perform
transactions in existing Scudder fund accounts, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890. During periods of extreme
economic or market changes, or other conditions, it may be difficult for you to
effect telephone transactions in your account. In such an event you should write
to the Fund; please see "How to contact Scudder" for the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
24
<PAGE>
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
Scudder No-Fee IRA
401(k) Plans
Profit Sharing and Money Purchase Pension Plans (Keogh Plans)
403(b) Plans
SEP-IRA
Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life
Insurance Company (in New York State, Intramerica Life Insurance Company [S
1802]). The contract is offered by Scudder Insurance Agency, Inc. (in New York
State, Nevada and Montana, Scudder Insurance Agency of New York, Inc.). CNL,
Inc. is the Principal Underwriter. Scudder Horizon Plan is not available in all
states.
25
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Daniel Pierce*
Trustee
Olin Barrett*
Vice President
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
26
<PAGE>
<TABLE>
<CAPTION>
Investment products and services
<S> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
- -------------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state and local taxes. *Not available
in all states. +++A no-load variable annuity contract provided by Charter
National Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens &
Clark, Inc., are traded on various stock exchanges. ++For information on Scudder
Treasurers Trust(TM), an institutional cash management service that utilizes
certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information: Please address all correspondence to:
<S> <C> <C>
For existing account service Scudder Investor Relations The Scudder Funds
and transactions 1-800-225-5163 P.O. Box 2291
Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line (SAIL)
redemptions 1-800-343-2890
Investment Information: Or Stop by a Scudder Funds Center:
To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one service
the Scudder funds, for 1-800-225-2470 of the Scudder Funds Centers. Check for a Funds Center near you--they
additional applications and can be found in the following cities:
prospectuses, or for investment
questions
For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago SanDiego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*, funds designed
institutional cash management service for corporations, to meet the broad investment management and service
non-profit organizations and trusts which utilizes needs of banks and other institutions, call: 1-800-854-8525.
certain portfolios of Scudder Fund, Inc.* ($100,000
minimum), call: 1-800-541-7703.
</TABLE>
Scudder Investor Relations and Scudder Funds Centers are services
provided through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees
and expenses. Please read it carefully before you invest or send money.
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
and
SCUDDER CALIFORNIA TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Mutual Funds
Specializing in the Management of
California Municipal Security Portfolios
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund dated August
1, 1995, as amended from time to time, a copy of which may be obtained without
charge by writing to Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objectives and Policies of Scudder California Tax Free Money Fund.........................1
General Investment Objective and Policies of Scudder California Tax Free Fund................................3
Investments, Investment Techniques and Considerations of the Funds..........................................12
Trustees' Power to Change Objectives and Policies...........................................................29
Investment Restrictions.....................................................................................29
PURCHASES............................................................................................................31
Additional Information about Opening an Account.............................................................31
Checks......................................................................................................32
Wire Transfer of Federal Funds..............................................................................32
Share Price.................................................................................................32
Share Certificates..........................................................................................33
Other Information...........................................................................................33
EXCHANGES AND REDEMPTIONS............................................................................................33
Exchanges...................................................................................................33
Redemption by Telephone.....................................................................................34
Redemption by Mail or Fax...................................................................................35
Redemption by Write-A-Check.................................................................................35
Other Information...........................................................................................35
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................36
The Pure No-Load(TM) Concept................................................................................36
Dividend and Capital Gain Distribution Options..............................................................37
Scudder Funds Centers.......................................................................................37
Reports to Shareholders.....................................................................................38
Transaction Summaries.......................................................................................38
THE SCUDDER FAMILY OF FUNDS..........................................................................................38
SPECIAL PLAN ACCOUNTS................................................................................................41
Automatic Withdrawal Plan...................................................................................41
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts,
Nominees and Corporations..............................................................................42
Automatic Investment Plan...................................................................................42
Uniform Transfers/Gifts to Minors Act.......................................................................42
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................42
PERFORMANCE INFORMATION..............................................................................................43
Average Annual Total Return.................................................................................43
Cumulative Total Return.....................................................................................44
Total Return................................................................................................44
Yield.......................................................................................................44
Effective Yield.............................................................................................45
Tax-Equivalent Yield........................................................................................45
Comparison of Fund Performance..............................................................................45
ORGANIZATION OF THE FUNDS............................................................................................49
INVESTMENT ADVISER...................................................................................................50
Personal Investments by Employees of the Adviser............................................................52
TRUSTEES AND OFFICERS................................................................................................53
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
----
REMUNERATION.........................................................................................................54
DISTRIBUTOR..........................................................................................................55
TAXES................................................................................................................56
Federal Taxation............................................................................................56
State Taxation..............................................................................................59
PORTFOLIO TRANSACTIONS...............................................................................................60
Brokerage Commissions.......................................................................................60
Portfolio Turnover..........................................................................................61
NET ASSET VALUE......................................................................................................61
ADDITIONAL INFORMATION...............................................................................................63
Experts.....................................................................................................63
Shareholder Indemnification.................................................................................63
Ratings of Municipal Obligations............................................................................63
Commercial Paper Ratings....................................................................................64
Glossary....................................................................................................65
Other Information...........................................................................................65
FINANCIAL STATEMENTS.................................................................................................66
Scudder California Tax Free Money Fund......................................................................66
Scudder California Tax Free Fund............................................................................66
ii
</TABLE>
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "Investment objectives and policies"
in the Funds' prospectus.)
Scudder California Tax Free Money Fund and Scudder California Tax Free
Fund (each a "Fund," collectively the "Funds") are each a series of Scudder
California Tax Free Trust (the "Trust"). The Trust is a pure no-load(TM),
open-end management investment company presently consisting of two series.
General Investment Objectives and Policies of Scudder California Tax Free Money
Fund
The investment objectives of Scudder California Tax Free Money Fund are
stability of capital and the maintenance of a constant net asset value of $1.00
per share, while providing California taxpayers income exempt from California
state personal income and regular federal income taxes. The Fund pursues these
objectives through the professional and efficient management of a high quality
portfolio consisting primarily of short-term municipal obligations (as defined
under "Investments, Investment Techniques and Considerations of the Funds --
Municipal Obligations") having remaining maturities 397 calendar days or less
with a dollar-weighted average portfolio maturity of 90 days or less. The Fund
seeks to maintain a constant net asset value of $1.00 per share, although in
certain circumstances this may not be possible. There can be no assurance that
the Fund's objectives will be met or that income to shareholders which is exempt
from regular federal income tax will be exempt from state and local taxes and
the federal alternative minimum tax.
Scudder California Tax Free Money Fund invests in municipal securities
of issuers located in California and other qualifying issuers (including Puerto
Rico, the U.S. Virgin Islands and Guam). It is the opinion of bond counsel,
rendered on the date of issuance, that income from these obligations is exempt
from both California personal income tax and regular federal income tax
("California municipal securities"). Because the Fund is intended for investors
subject to both California state personal income and federal income taxes, it
may not be appropriate for all investors and is not available in all states. The
Fund may also invest in taxable obligations for temporary defensive purposes.
The Fund's Investments. The Fund seeks to provide California taxpayers with
income exempt from both California state personal and regular federal income tax
through a portfolio of high quality municipal securities. As a matter of
fundamental policy which cannot be changed without the approval of a majority of
the Fund's outstanding voting securities (as defined under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be invested in
municipal obligations the income from which is exempt from both regular federal
and California state personal income tax except that the Fund may invest more
than 20% of its net assets in securities the income from which may be subject to
federal and California income taxes during periods which, in the opinion of the
Fund's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"),
require a temporary defensive position for the protection of shareholders.
Under normal market conditions, the Fund's portfolio securities consist
of California municipal securities. In addition, the Fund may make temporary
taxable investments as described below, and may hold cash. Generally, the Fund
may purchase only securities which are rated, or issued by an issuer rated,
within the two highest quality ratings categories of two or more of the
following rating agencies: Moody's Investors Service, Inc. ("Moody's") (Aaa and
Aa, MIG 1 and MIG 2, and P1), Standard & Poor's ("S&P") (AAA and AA, SP1+ and
SP1, A1+ and A1), and Fitch Investors Service, Inc. ("Fitch") (AAA and AA, F1+,
F1 and F2). Where only one rating agency has rated a security (or its issuer),
the Fund may purchase that security as long as the rating falls within the
categories described above. In addition, unrated municipal obligations are
considered as being within the foregoing quality ratings categories if other
equal or junior municipal obligations of the same issuer are rated and their
ratings are within the foregoing ratings. The Fund may also invest in municipal
obligations which are unrated if such securities possess creditworthiness
comparable to those rated securities in which the Fund may invest. Comparability
is determined by the Adviser acting pursuant to guidelines adopted by, and under
the supervision of, the Trustees.
Subsequent to its purchase by the Fund, an issue of municipal
obligations may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. The Adviser will dispose of such security
unless the Board of Trustees of the Fund determines that such disposal is not in
the best interest of the Fund. To the extent that the ratings accorded by
Moody's, S&P or Fitch for municipal obligations may change as a result of
<PAGE>
changes in these rating systems the Adviser attempts to use comparable ratings
as standards for its investment in municipal securities in accordance with the
investment policies contained herein.
From time to time on a temporary basis or for temporary defensive
purposes, the Fund may, subject to its investment restrictions, hold cash and
invest in temporary taxable investments which mature in one year or less at the
time of purchase, consisting of (1) other obligations issued by or on behalf of
municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and bankers' acceptances; and (5)
repurchase agreements with respect to any of the obligations which the Fund is
permitted to purchase. The Fund does not invest in instruments issued by banks
or savings and loan associations unless at the time of investment such issuers
have total assets in excess of $1 billion (as of the date of their most recently
published financial statements). Commercial paper investments are limited to
commercial paper rated A-1 by S&P, Prime 1 by Moody's or F-1 by Fitch. The Fund
may hold cash or invest in temporary taxable investments due, for example, to
market conditions or pending investment of proceeds of subscriptions for shares
of the Fund or proceeds from the sale of portfolio securities or in anticipation
of redemptions. However, the Adviser expects to invest such proceeds in
municipal obligations as soon as practicable. Interest income from temporary
investments may be taxable to shareholders as ordinary income.
Amortized Cost Valuation of Portfolio Securities. Pursuant to Rule 2a-7 of the
Securities and Exchange Commission (the "SEC"), Scudder California Tax Free
Money Fund uses the amortized cost method of valuing its investments, which
facilitates the maintenance of the Fund's per share net asset value at $1.00.
The amortized cost method, which is used to value all of the Fund's portfolio
securities, involves initially valuing a security at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
Consistent with the provisions of the Rule, the Fund maintains a
dollar-weighted average portfolio maturity of 90 days or less, purchases only
instruments having remaining maturities of 397 calendar days or less, and
invests only in securities determined by the Trustees to be of high quality with
minimal credit risks.
The Trustees have also established procedures designed to stabilize, to
the extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of the
Fund's portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Fund's net asset value calculated by using available
market quotations or market equivalents (i.e., determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost. Market
quotations and market equivalents used in such review may be obtained from an
independent pricing service approved by the Trustees.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds l/2 of l%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00 the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro-rata basis, and (2) to offset each shareholder's pro-rata
portion of the deviation between net asset value per share and $1.00 from the
shareholder's accrued dividend account or from future dividends. The Fund may
hold cash for the purpose of stabilizing its net asset value per share. Holdings
of cash, on which no return is earned, would tend to lower the yield of the
Fund.
2
<PAGE>
Special Considerations. The investment objectives and policies of
Scudder California Tax Free Money Fund are sought through the following
additional strategies employed in the management of the portfolio which are
described under "Investments, Investment Techniques and Considerations of the
Funds":
1. Income Level and Credit Risk.
2. Municipal Obligations.
3. Investing in California.
4. When-Issued Securities.
5. Stand-By Commitments.
6. Third Party Puts.
7. Repurchase Agreements.
8. Reverse Repurchase Agreements.
General Investment Objective and Policies of Scudder California Tax Free Fund
The investment objective of the Fund is to provide income that is
exempt from both California state personal income as well as regular federal
income taxes when distributed to California residents through the professional
and efficient management of a portfolio consisting principally of California
municipal securities. In pursuit of its objective, the Fund invests principally
in California municipal securities that are rated A or better by Moody's, S&P or
Fitch, or are of equivalent quality as determined by the Adviser. There can be
no assurance that the objective of the Fund will be met or that all income to
shareholders which is exempt from regular federal income taxes will be exempt
from state or local taxes, or from the federal alternative minimum tax.
Scudder California Tax Free Fund invests in municipal securities of
issuers located in California and other qualifying issuers (including Puerto
Rico, the U.S. Virgin Islands and Guam). It is the opinion of bond counsel,
rendered on the date of issuance, that income from these obligations is exempt
from both California personal income tax and regular federal income tax. The
Fund may also invest in taxable obligations for temporary or defensive purposes.
The Fund's Investments. As a matter of fundamental policy which cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities (as defined under "Investment Restrictions"), at least 80% of the net
assets of the Fund will be invested in California municipal securities except as
stated in the second to last sentence of the following paragraph. Furthermore,
all of the Fund's portfolio securities, including short-term obligations, will
be (a) rated at the time of purchase within the six highest grades assigned by
Moody's, S&P or Fitch, (b) if not rated, judged at the time of purchase by the
Adviser, to be of a quality comparable to the six highest ratings categories of
Moody's, S&P or Fitch and to be readily marketable, or (c) issued or guaranteed
by the U.S. Government. Should the rating of a portfolio security be downgraded,
the Adviser will determine whether it is in the best interest of the Fund to
retain or dispose of the security.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies and instrumentalities of the U.S. Government; and (3) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and bankers' acceptances. Notwithstanding the
foregoing, the Fund may invest more than 20% of its net assets in securities the
income from which may be subject to federal and California income tax during
periods which, in the opinion of the Adviser, require a defensive position for
the protection of shareholders. Investors should be aware that shares of the
Fund do not represent a complete investment program.
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The Fund may invest up to 25% of its total assets in fixed-income
securities rated below Baa by Moody's, or below BBB by S&P or Fitch, or in
unrated securities considered to be of equivalent quality. The Fund may not
invest in fixed-income securities rated below B by Moody's, S&P or Fitch, or
their equivalent. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics. Securities rated below BBB
are commonly referred to as "junk bonds" and involve greater price volatility
and higher degrees of speculation with respect to the payment of principal and
interest than higher-quality fixed-income securities. In addition, the trading
market for these securities is generally less liquid than for higher-rated
securities and the Funds may have difficulty disposing of these securities at
the time they wish to do so. The lack of a liquid secondary market for certain
securities may also make it more difficult for the Funds to obtain accurate
market quotations for purposes of valuing their portfolios and calculating their
net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the year ended March 31, 1995, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio were as
follows: 50% rated AAA, 10% AA, 31% A and 9% BBB. The bonds are rated by
Moody's, S&P or Fitch, or of equivalent quality as determined by the Adviser.
Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover the Fund's original investment.
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Participation interests represent undivided interests in municipal
leases, installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by the Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace in which the
security trades. In addition, the Adviser will consider factors unique to
particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.
The Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide the Fund with the right to a pro rata undivided interest
in the underlying municipal lease obligations. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of the Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. The Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
state income tax, if applicable.
Indexed Securities. Scudder California Tax Free Fund may invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Strategic Transactions and Derivatives. Scudder California Tax Free Fund may,
but is not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates and broad or
specific market movements), to manage the effective maturity or duration of the
Fund's portfolio, or to enhance potential gain. These strategies may be executed
through the use of derivative contracts. Such strategies are generally accepted
as a part of modern portfolio management and are regularly utilized by many
mutual funds and other institutional investors. Techniques and instruments may
change over time as new instruments and strategies are developed or regulatory
changes occur.
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In the course of pursuing these investment strategies, the Fund 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 financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's 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 the 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 Fund to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the 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 the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the 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,
the 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
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, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the 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
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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.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers," or broker/dealers, domestic or foreign banks
or other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO") or are determined to be of equivalent
credit quality by the Adviser. The staff of the SEC currently takes the position
that OTC options purchased by the Fund, and portfolio securities "covering" the
amount of the 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 the Fund's limitation on investing no more than 10% of its assets in
illiquid securities.
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If the 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 the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, 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 the Fund must be "covered"
(i.e., the 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 the Fund will receive the option premium to
help protect it against loss, a call sold by the Fund exposes the 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 the
Fund to hold a security or instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities, 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. The Fund will not sell put options if, as a result, more than 50% of
the 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 the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial 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, for duration
management and for risk management 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 the 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.
The Fund's use of financial 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 only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the 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 the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
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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. The 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 the 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 the
Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The 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 the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
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.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the Investment Company Act of 1940, as amended (the "1940 Act") and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The 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, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
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the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade 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 high grade securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate liquid
high grade assets equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate liquid, high grade assets equal to the exercise price.
OTC options entered into by the 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 the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating 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 assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
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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,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAXES.")
Management Strategies. In pursuit of its investment objectives, the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, yield, and the relationship of current price to maturity
value. However, recognizing the dynamics of municipal bond prices in response to
changes in general economic conditions, fiscal and monetary policies, interest
rate levels and market forces such as supply and demand for various bond issues,
the Adviser, subject to the Trustees' review, performs credit analysis and
manages the Fund's portfolio continuously, attempting to take advantage of
opportunities to improve total return, which is a combination of income and
principal performance over the long term. The primary strategies employed in the
management of the Fund's portfolio are:
Emphasis on Credit Analysis. As indicated above, the Fund's portfolio
is invested in municipal obligations rated within, or judged by the Adviser to
be of a quality comparable to, the six highest rating categories of Moody's, S&P
or Fitch. The ratings assigned by Moody's, S&P and Fitch represent their
opinions as to the quality of the securities which they undertake to rate. It
should be emphasized, however, that ratings are relative and are not absolute
standards of quality. Furthermore, even within this segment of the municipal
bond market, relative credit standing and market perceptions thereof may shift.
Therefore, the Adviser believes that it should review continuously the quality
of municipal obligations.
The Adviser has over many years developed an experienced staff to
assign its own quality ratings which are considered in making value judgments
and in arriving at purchase or sale decisions. Through the discipline of this
procedure the Adviser attempts to discern variations in credit rankings of the
published services and to anticipate changes in credit ranking.
Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal obligations of differing maturities, maturities
may be varied according to the structure and level of interest rates, and the
Adviser's expectations of changes therein. To the extent that a Fund invests in
short-term maturities, capital volatility will be reduced.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal obligations of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
disparities in yield relationships may afford opportunities to implement a
flexible policy of trading a Fund's holdings in order to invest in more
attractive market sectors or specific issues.
Market Trading Opportunities. In pursuit of the above the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than three months) if the Adviser believes that such transactions,
net of costs, would further the attainment of the Fund's objective. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that either Fund will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent such
limitation is necessary for it to qualify as a "regulated investment company"
under the Internal Revenue Code.
Special Considerations. The investment objectives and policies of Scudder
California Tax Free Fund are sought through the following additional strategies
employed in the management of the portfolio which are described under
"Investments, Investment Techniques and Considerations of the Funds":
1. Income Level and Credit Risk.
2. Municipal Obligations.
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3. Investing in California.
4. When-Issued Securities.
5. Stand-by Commitments.
6. Third Party Puts.
7. Repurchase Agreements.
8. Reverse Repurchase Agreements.
Investments, Investment Techniques and Considerations of the Funds
Income Level and Credit Risk. Because the Funds principally intend to hold
investment-grade (in the case of California Tax Free Fund) and high quality (in
the case of California Tax Free Money Fund) municipal obligations, the income
earned on shares of each Fund tend to be less than it might be on a portfolio
emphasizing lower quality securities. Municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy laws, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal of and
interest on its or their municipal obligations may be materially affected.
Scudder California Tax Free Fund may invest in municipal securities rated B by
S&P, Fitch or Moody's although it intends to invest principally in securities
rated in higher grades. Although each Fund's quality standards are designed to
minimize the credit risk of investing in the Fund, that risk cannot be entirely
eliminated. Shares of the Funds are not insured by any agency of California or
of the U.S. Government.
Municipal Obligations. Municipal obligations are issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on most of these obligations is generally exempt from
regular federal income tax in the hands of most individual investors, although
it may be subject to the individual and corporate alternative minimum tax. The
two principal classifications of municipal obligations are "notes" and "bonds."
1. Municipal Notes. Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: tax anticipation notes; revenue anticipation notes;
bond anticipation notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, such financing provides for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds which meet longer term capital
needs generally have maturities of more than one year when issued, have two
principal classifications: "general" obligation bonds and "revenue" bonds.
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Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to the Fund's 20% limitation on
investing in AMT bonds. For the purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, industrial
development or other private activity bonds ultimately payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.
3. Other Municipal Obligations. There is, in addition, a variety of
hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
The Funds may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Funds, or (3) to maintain
their respective investment portfolio ratings standards. A bank that issues a
repurchase commitment may receive a fee from a Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that these Funds may purchase are
payable on demand on not more than thirty calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. The Funds determine the variable rate demand instruments
that they purchase in accordance with procedures approved by the Trustees to
minimize credit risks. The Adviser may determine that an unrated variable rate
demand instrument meets a Fund's quality criteria by reason of being backed by a
letter of credit or guarantee issued by a bank that meets the quality criteria
for the Fund. Thus, either the credit of the issuer of the municipal obligation
or the guarantor bank or both meet the quality standards of a Fund. The Adviser
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reevaluates each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet the Fund's quality
criteria.
The value of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should decrease changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with the comparable portfolio of fixed income
securities. The Funds may purchase variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value of such variable rate
demand notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed interest
rate securities. Accordingly, interest rates on the variable rate demand
instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities.
The maturity of the variable rate demand instruments held by the Funds
are ordinarily deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
General Considerations. An entire issue of municipal obligations may be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 prior to offer and
sale unless an exemption from such registration is available, municipal
obligations which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal obligations which were not
publicly offered initially.
Obligations purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue.
The Funds expect that each will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of municipal
obligations.
Investing in California. The following information as to certain California risk
factors is given to investors in view of each Fund's policy of concentrating its
investments in California issuers. Such information constitutes only a brief
summary, does not purport to be a complete description and is based on
information from official statements as of the date of this Statement of
Additional Information relating to securities offerings of the State of
California.
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Economic Factors. The Governor's 1993-1994 Budget, introduced on January 8,
1993, proposed general fund expenditures of $37.3 billion, with projected
revenues of $39.9 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, projected the State would have an accumulated deficit of about $2.75
billion by June 30, 1993, essentially unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month period. Unlike
previous years, the Governor's Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and expenditure forecasts and
proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending.
The 1993-94 Budget Act was predicated on general fund revenues and
transfers estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991--a half cent temporary sales tax, a deferral of operating
loss carryforwards, and repeal by initiative of a sales tax on candy and snack
foods.
The 1993-94 Budget Act also assumed special fund revenues of $11.9
billion, an increase of 2.9 percent over 1992-93.
The 1993-94 Budget Act included general fund expenditures of $38.5
billion (a 6.3 percent reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues. The
1993-94 Budget Act also included special fund expenditures of $12.1 billion, a
4.2 percent increase. The 1993-94 Budget Act reflected the following major
adjustments:
1. Changes in local government financing to shift about $2.6
billion in property taxes from cities, counties, special
districts and redevelopment agencies to school and community
college districts, thereby reducing general fund support by an
equal amount. About $2.5 billion is permanent, reflecting
termination of the State's "bailout" of local governments
following the property tax cuts of Proposition 13 in 1978 (See
"Constitutional, Legislative and Other Factors" below).
The property tax revenue losses for cities and counties were
offset in part by additional sales tax revenues and mandate
relief.
2. The 1993-94 Budget Act projected K-12 Proposition 98
funding on a cash basis at the same per-pupil level as 1992-93
by providing schools a $609 million loan payable from future
years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692
million of aid to the State from the federal government to
offset health and welfare costs associated with foreign
immigrants living in the State, which would reduce a like
amount of General Fund expenditures. About $411 million of
this amount was one-time funding. Congress ultimately
appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs
and $400 million in support for higher education (partly
offset by fee increases at all three units of higher
education) and various miscellaneous cuts (totalling
approximately $150 million) in State government services in
many agencies, up to 15 percent.
5. A 2-year suspension of the renters' tax credit ($390
million expenditure reduction in 1993-94).
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6. Miscellaneous one-time items, including deferral of payment
to the Public Employees Retirement Fund ($339 million) and a
change in accounting for debt service from accrual to cash
basis, saving $107 million.
The 1993-94 Budget Act contained no general fund tax/revenue increases
other than a two year suspension of the renters' tax credit. The 1993-94 Budget
Act suspended the 4 percent automatic budget reduction trigger, as was done in
1992-93, so cuts could be focused.
Administration reports during the course of the 1993-94 Fiscal Year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-94 Budget Act was adopted. Overall, revenues for the
1993-94 Fiscal Year were about $800 million lower than original projections, and
expenditures were about $780 million higher, primarily because of higher health
and welfare caseloads, lower property taxes which required greater State support
for K-14 education to make up the shortfall, and lower than anticipated federal
government payments for immigration-related costs. The reports in May and June,
1994, indicated that revenues in the second half of the 1993-94 Fiscal Year have
been very close to the projections made in the Governor's Budget of January 10,
1994, which is consistent with a slow turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the final
June receipts, reported that June revenues were $114 million (2.5 percent) above
projection, with final end-of-year results at $377 million (about 1 percent)
above the May Revision projections. Part of this result was due to end-of-year
adjustments and reconciliations. Personal income tax and sales tax continued to
track projections very well. The largest factor in the higher than anticipated
revenues was from bank and corporation taxes, which were $140 million (18.4
percent) above projection in June. While the higher June receipts are reflected
in the actual 1993-94 Fiscal Year cash flow results, and help the starting cash
balance for the 1994-95 Fiscal Year, the Department of Finance has not adjusted
any of its revenue projections for the 1994-95 or 1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the deficit
retirement plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 Fiscal
Year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on
the Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties, which
were declared as State and federal disaster areas by January 18. Current
estimates of total property damage (private and public) are in the range of $20
billion, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in
the areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.
Damage to state-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Major highways have now been reopened. The campus of California State
University at Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in temporary closure of the campus. It has reopened
using borrowed facilities elsewhere in the area and many temporary structures.
There was also some damage to the University of California at Los Angeles and to
an office building in Van Nuys (now open after a temporary closure). Overall,
except for the temporary road and bridge closures, and CSU-Northridge, the
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earthquake did not and is not expected to significantly affect State government
operations.
The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government provided
substantial earthquake assistance.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor originally proposed that the State will have to pay about $1.9 billion
for earthquake relief costs, including a 10 percent match to some of the federal
funds, and costs for some programs not covered by the federal aid. The Governor
proposed to cover $1.05 billion of these costs from a general obligation bond
issue which was on the June 1994 ballot, but it was not approved by the voters.
The Governor subsequently announced that the State's share for transportation
projects would come from existing Department of Transportation funds (thereby
delaying other, non-earthquake related projects), that the State's share for
certain other costs (including local school building repairs) would come from
reallocating existing bond funds, and that a proposed program for homeowner and
small business aid supplemental to federal aid would have to be abandoned. Some
other costs will be borrowed from the federal government in a manner similar to
that used by the State of Florida after Hurricane Andrew; pursuant to Senate
Bill 2383, repayment will have to be addressed in 1995-96 or beyond. The 1995-96
Governor's Budget includes $60 million as the first repayment of an estimated
$121.4 million in loans prior to June 30, 1995.
The 1994-95 Fiscal Year represents the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment to
produce a balanced budget. Many program cuts and budgetary adjustments have
already been made in the last three years. The Governor's Budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year, and proposed a two-year solution. The budget proposal
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in operating surpluses for the budget for both 1994-95
and 1995-96, and lead to the elimination of the accumulated budget deficit,
estimated at about $1.8 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projects revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an improving
economy. Also included in this figure is a projected receipt of about $360
million from the Federal Government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the Federal Budget is expected by October 1994. The
Legislature took no action on a proposal in the January 1994-95 Governor's
Budget to undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the State's
current sales tax.
The 1994-95 Budget Act projects Special Fund revenues of $12.1 billion,
a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The 1994-95 Budget Act also
projects Special Fund expenditures of $12.3 billion, a 4.7% decrease from
1993-94 estimated expenditures. The principal features of the 1994-95 Budget Act
were the following:
1. Receipt of additional federal aid in 1994-95 of about $400
million for costs of refugee assistance and medical care for
undocumented immigrants, thereby offsetting a similar General
Fund cost. The State will not know how much of these funds it
will receive until the Federal FY 1995 Budget is passed.
2. Reductions of approximately $1.1 billion in health and
welfare costs. A 2.3% reduction in Aid to Family with
Dependent Children payments (equal to about $56 million for
the entire fiscal year) has been suspended by court order.
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3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for
California State University. It is anticipated that student
fees for both the University of California and the California
State University will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by
$526 million from 1993-94 levels, representing an increase for
enrollment growth and inflation. Consistent with previous
budget agreements, Proposition 98 funding provides
approximately $4,217 per student for K-12 schools, equal to
the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed
in 1992 and 1993 which require counties and other local
agencies to transfer funds to local school districts, thereby
reducing State aid. Some counties had implemented a method of
making such transfers which provided less money for schools if
there were redevelopment agency projects. The new legislation
bans this method of transfer. If all counties had implemented
this method, General Fund aid to K-12 schools would have been
$300 million higher in each of the 1994-95 and 1995-96 Fiscal
Years.
6. The 1994-95 Budget Act provides funding for anticipated
growth in the State's prison inmate population, including
provisions for implementing recent legislation (the so-called
"Three Strikes" law) which requires mandatory life prison
terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund
transfers ($255 million) totalling in the aggregate
approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters' tax credit was suspended for two
years (1993 and 1994). A ballot proposition to permanently restore the renters'
tax credit after this year failed at the June, 1994 election. The Legislature
enacted a further one-year suspension of the renters' tax credit, for 1995,
saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumed that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal year
included the issuance of $4.0 billion of revenue anticipation warrants on July
26, 1994, to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year
necessarily entails greater risks of variance from assumptions, and because the
Governor's two-year budget plan assumes receipt of a large amount of federal aid
in the 1995-96 Fiscal Year for immigration-related costs which is uncertain, the
Legislature enacted a backup budget adjustment mechanism to mitigate possible
deviations from projected revenues, expenditures or internal borrowable
resources which might reduce available cash resources during the two-year plan,
so as to assure repayment of the warrants.
Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller was required to make a report by November 15, 1994 on whether the
projected cash resources for the General Fund as of June 30, 1995 will decrease
more than $430 million from the amount projected by the State in its Official
Statement in July 1994 for the sale of $4,000,000,000 of Revenue Anticipation
Warrants. On November 15, 1994, the State Controller issued the report on the
State's cash position required by the Budget Adjustment Law. The report
indicated that the cash position of the General Fund on June 30, 1995 would be
$581 million better than was estimated in the July 1994 cash flow projections
and therefore, no budget adjustment procedures will be invoked for the 1994-95
Fiscal Year. As explained earlier, the Law would only be implemented if the
State Controller estimated that borrowable resources on June 30, 1995 would be
at least $430 million lower than projected.
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The State Controller's report identified a number of factors which have
led to the improved cash position of the State. Estimated revenues and transfers
for the 1994-95 Fiscal Year other than federal reimbursement for immigration
costs were up about $650 million. The largest portion of this was in higher bank
and corporation tax receipts, but all major tax sources were above original
projections. However, most of the federal immigration aid revenues projected in
connection with the 1994-95 Budget Act and in the July 1994 cash flows will not
be received, as indicated above, leaving a net increase in revenues of $322
million.
On the expenditure side, the State Controller reported that estimated
reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for federal aid) of
$672 million. However, the July 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of balances in
special funds available for internal borrowing resulted in an estimated
reduction of such borrowable resources of $6 million. The combination of these
factors results in the estimated improvement of the General Fund's cash position
of $581 million. The State Controller's revised cash flow projections for
1994-95 have allocated this improvement to two line items: an increase from $0
to $427 million in the estimated ending cash balance of the General Fund on June
30, 1995, and an increase in unused borrowable resources of $154 million.
The State Controller's report indicated that there was no anticipated
cash impact in the 1994-95 Fiscal Year for recent initiatives on "three strikes"
criminal penalties and illegal immigration which were approved by voters on
November 8, 1994. At a hearing before a committee of the Legislature on November
15, 1994, both the Legislative Analyst and the Department of Finance concurred
in the reasonableness of the State Controller's report. (The Legislative Analyst
had issued a preliminary analysis on November 1, 1994 which reached a conclusion
very close to that of the State Controller.) The State Controller's report makes
no projections about whether the Law may have to be implemented in 1995-96.
However, both the State Controller and the Legislative Analyst in the November
15 hearing noted that the July, 1994 cash flows for the 1995-96 Fiscal Year
place continued reliance on large amounts of federal assistance for immigration
costs, which did not materialize this year, indicating significant budget
pressures for next year. The Department of Finance indicated that the budgetary
issues identified in the hearing would be addressed in the Governor's Budget
proposal for the 1995-96 Fiscal Year, which will be released in early January,
1995.
The 1995-96 Governor's Budget, discussed below, contains a reforecast
of revenues and expenditures for the 1994-95 Fiscal Year. The Department of
Finance Bulletins for February and March 1995 report that combined General Fund
revenues for February, 1995 were about $356 million below forecast, but combined
revenues for January and February were only about $82 million (or 0.3 percent)
below the 1995-96 Governor's Budget forecast. The largest component of the
decrease is attributable to personal income tax receipts, which were about $131
million (or 1.1 percent) below the two months' forecast. This decrease in
personal income tax receipts appears to be largely attributable to fourth
quarter 1994 activity, probably in the anticipation of tax reform, with some
taxpayers shifting income into 1995 to the extent possible. The withholding
component comprised $77 million of this shortfall, but the Department of Finance
does not yet view this as significant. Additionally, sales and use tax receipts
were very close to forecast for the two-month period, while bank and corporation
tax receipts were about $42 million (or 1.5 percent) below the two months'
forecast. Miscellaneous revenues were about $117 million (or 6.2 percent) above
forecast for the two months, but the Department of Finance is not yet able to
determine whether this gain is real, or is instead attributable to cash flow
factors.
Initial analysis of the federal Fiscal Year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-95
Budget Act. Because of timing considerations in applying for these federal
funds, the Department estimates that about $33 million of these funds will be
received during the State's 1994-95 Fiscal Year, with the balance received in
the following fiscal year. It does not appear that the federal budget contains
any of the additional $400 million in funding for refugee assistance and health
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costs which were also assumed in the 1994-95 Budget Act, but the Department
expects the State to continue its efforts to obtain some or all of these federal
funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal Year
Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates General
Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent over
1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the
Governor's realignment proposal and the first year of his tax cut proposal (see
principal features of the Proposed Budget below for further discussions).
Without these two proposals, General Fund revenues would be projected at
approximately $43.8 billion, or an increase of 3.3 percent over 1994-95.
Expenditures are estimated at $41.7 billion (essentially unchanged from
1994-95). Special Fund revenues are estimated at $13.5 billion (10.7 percent
higher than 1994-95) and Special Fund expenditures are estimated at $13.8
billion (12.2 percent higher than 1994-95). The Proposed Budget projects that
the General Fund will end the fiscal year at June 30, 1996 with a budget surplus
in the Special Fund for Economic Uncertainties of about $92 million, or less
than 1 percent of General Fund expenditures, and will have repaid all of the
accumulated budget deficits.
The following are the principal features of the Proposed Budget:
1. The principal feature of the Proposed Budget is a proposed
15 percent cut in personal income and corporate tax rates,
which would be phased in at 5 percent per year starting in
1996. Existing personal income tax rates, which are scheduled
to drop from 11 percent top rate to 9.3 percent in 1996, would
be continued during the time the overall tax cut takes effect.
This proposal would reduce General Fund revenues by $225
million in 1995-96, but the revenue reduction would reach $3.6
billion by 1998-99.
2. The Governor has proposed an expansion of the realignment
program between the State and counties, so that counties will
take on greater responsibility for welfare and social
services, while the State will take on increased funding of
trial court costs. The proposal includes transfer of about $1
billion of State revenues, from sales taxes and trial court
funding moneys, to counties. The net effect of the shifts,
however, is estimated to save the General Fund about $240
million.
3. The Governor proposes further cuts in health and welfare
costs totaling about $1.4 billion. Some of these cuts would
require federal legislative approval.
4. Proposition 98 funding for schools and community colleges
will increase by about $1.2 billion, reflecting strong General
Fund revenue growth. Per-pupil expenditures are projected to
increase by $61 to $4,292. For the first time in several
years, a cost-of-living increase (2.2 percent) is added to the
enrollment growth factor. The Governor proposes to set aside
about $514 million of the Proposition 98 funding increase to
repay prior years' loans from the General Fund to schools. As
the legality of these loans is currently being challenged in a
lawsuit, the Governor proposes to set the amount aside in
escrow until the litigation is resolved.
5. The Proposed Budget includes increases in funding for the
University of California ($63 million General Fund) and the
California State University system ($3 million General Fund).
The Governor has proposed a four-year funding "company" for
the higher education units which includes both annual
increases in State funding and increases in student fees.
6. The Proposed Budget assumes receipt of $830 million in new
federal aid for costs of undocumented and refugee immigrants,
above commitments already made by the federal government. This
amount is much less than an estimated $2.8 billion which had
been included in the Governor's pro-forma two-year plan from
last summer.
The Proposed Budget contains a cash flow projection (based on all the
assumptions described above) which shows about $1 billion of unused borrowable
resources at June 30, 1996, providing this amount of "cushion" before the budget
"trigger" would have to be invoked.
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However, a report issued by the Legislative Analyst in February 1995
notes that the Proposed Budget is subject to a number of major risks, including
receipt of the expected federal immigration aid and other federal actions to
allow health and welfare costs, and the outcome of several lawsuits concerning
previous budget actions which the State has lost at the trial court level, and
which are under appeal. This Analyst's Report also estimates that, despite more
favorable revenues, the two-year budget estimates made in July 1994 are about $2
billion out of balance, principally because federal immigration aid appears
likely to be much lower than previously estimated. This shortfall is much
smaller than the State has faced in recent years, and has been addressed in the
Governor's Budget.
The Director of Finance is required to include updated cash-flow
statements for the 1994-95 and 1995-96 Fiscal Years in the May revision to the
1995-96 Fiscal Year budget proposal. By June 1, 1995, the State Controller must
concur with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing as of June
30, 1996, thereby requiring the State to rely solely on internal borrowable
resources, expenditure reductions or revenue increases to eliminate any
projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996 cash shortfall
identified by the State Controller. If such legislation is not enacted, within
five days thereafter the Director of Finance must reduce all General Fund
appropriations for the 1995-96 Fiscal Year, except the Required Appropriations,
by the percentage equal to the ratio of said 1996 cash shortfall to total
remaining General Fund appropriations for the 1995-96 Fiscal Year, excluding the
Required Appropriations.
On December 6, 1994, Orange County, California and its Investment Pool
(the "Pool") filed for bankruptcy under Chapter 9 of the United States
Bankruptcy Code. Approximately 187 California public entities, substantially all
of which are public agencies within the County, invested funds in the Pool. Many
of the agencies have various bonds, notes or other forms of indebtedness
outstanding, in some instances the proceeds of which were invested in the Pool.
Various investment advisors were employed by the County to restructure the Pool.
Such restructuring led to the sale of substantially all of the Pool's portfolio,
resulting in losses estimated to be approximately $1.7 billion or approximately
22% of amounts deposited by the Pool investors, including the County. It is
anticipated that such losses may result in delays or failures of the County as
well as investors in the Pool to make scheduled debt service payments. Further,
the County expects substantial budget deficits to occur in Fiscal Year 1995 with
possibly similar effects upon operations of investors in the Pool.
Investor access to monies in the Pool subsequent to the filing was
pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i) established
a formula for distribution of all available cash and securities from the Pool to
the Pool investors, including the County, (ii) established formulas for
distribution among certain settling Pool investors of several tranches of new
County obligations to be payable from, and in some instances secured by, certain
designated sources of potential recoveries on Pool related claims, and (iii)
designated certain outstanding short term note obligations of the County to be
senior to or on a parity with certain of the new County obligations. By order
dated May 22, 1995, following distribution of all available cash and securities
from the Pool to the Pool investors, including the County, the Bankruptcy Court
dismissed the bankruptcy filing of the Pool based upon the Court's finding that
the Pool was not eligible for relief under Chapter 9 of the Bankruptcy Code
because it is not a municipality and it has not been specifically authorized to
file under Chapter 9 as required by the Bankruptcy Code.
Following its bankruptcy filing, the County has, with Bankruptcy Court
approval, made payments of scheduled principal and interest on its outstanding
obligations where no alternative source of payment (such as reserve funds on
deposit with indenture trustees, letters of credit, municipal bond insurance
policies or other alternative payment sources) were available. The County has
not replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
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holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In addition, the County has failed to satisfy its obligation to
accept tenders of its $110,200,000 aggregate principal amount of Taxable Pension
Obligation Bonds, Series B used to finance County pension obligations. Interest
at a rate set pursuant to the bond documents has been timely paid on such
Pension Bonds. The failure to satisfy the contractual obligations discussed
above may constitute defaults under the documents governing such securities.
To June 30, 1995 there has been no default in payment of scheduled
interest and principal (excluding the tender payment described above) to holders
of County securities, although certain note issues are scheduled to mature at
various times thereafter and the Fund is unable to predict whether or to what
extent such notes will be timely paid by the County. On June 27, 1995, the
Bankruptcy Court approved a Stipulation and an Extension Agreement that, if they
both become effective, would offer to holders of certain short term note
obligations of the County ("Note Debt") who elect to be treated thereunder: (i)
extension of maturity dates to June 30, 1996; (ii) payment of monthly interest
at a rate below existing contract rates; (iii) accrual of monthly interest equal
to the difference between the amount paid and the contract rate, plus a
settlement adjustment of 0.95%; (iv) waiver of post-bankruptcy interest
recapture or disallowance; (v) waiver of defenses to repayment of the Note Debt
claims based on California limitations on municipal indebtedness; and (vi)
allowance of the Note Debt claims, subject to certain reserved rights. The
treatment described in the preceding sentence will be available to electing
holders of Note Debt provided that holders of at least 50% of the then issued
and outstanding aggregate principal amount of all Note Debt obligations elect
such treatment. If holders of at least 90% of the outstanding aggregate
principal amount of all Note Debt obligations elect such treatment, all of the
Note Debt obligations will be so treated. The Fund is unable to predict whether
and to what extent holders of Note Debt will elect to be treated under the
Extension Agreement.
On June 27, 1995, the voters of Orange County rejected, by a
substantial majority of those voting, an increase of 0.50% in the sales tax
imposed throughout the County. Prior to the election, spokespersons for the
County had indicated that passage of the sales tax increase was an important
factor in the County's ability to restructure its finances in a manner that
would permit eventual payment in full of all County securities. The Fund is
unable to predict the effect of the defeat of the sales tax increase on the
ability of the County to restructure its obligations and otherwise manage its
affairs.
Both S&P and Moody's have suspended or downgraded ratings on various
debt securities of the County and certain of the investors in the Pool and,
following the defeat of the proposition submitted to the voters on June 27,
announced their intention to downgrade the County's debt to default status,
regardless of whether the Stipulation and Extension Agreement receives approval
by holders of the Note Debt. Such suspensions or downgradings could affect both
price and liquidity of such securities. The Fund is unable to predict (i) the
occurrence of covenant and/or payment defaults with respect to obligations of
the County and/or investors in the Pool or (ii) the financial impact of any such
defaults or credit rating suspensions or downgradings upon the value of such
securities.
Constitutional, Legislative and Other Factors. Certain California constitutional
amendments, legislative measures, executive orders, administrative regulations
and voter initiatives could result in the adverse effects described below. The
following information constitutes only a brief summary, does not purport to be a
complete description, and is based on information drawn from official statements
and prospectuses relating to securities offerings of the State of California and
various local agencies in California, available as of the date of this
Prospectus. 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.
Certain Debt Obligations in which the Funds may invest 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.
In 1988, California enacted legislation providing for a water's-edge
combined reporting method if an election fee was paid and other conditions met.
On October 6, 1993, California Governor Pete Wilson signed Senate Bill 671
(Alquist) which modifies the unitary tax law by deleting the requirements that a
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taxpayer electing to determine its income on a water's-edge basis pay a fee and
file a domestic disclosure spreadsheet and instead requiring an annual
information return. Significantly, the Franchise Tax Board can no longer
disregard a taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing from $27 million
in 1993-94 to $616 million in 1999-2000, but others, including Assembly Speaker
Willie Brown, disagree with that estimate and assert that more revenue will be
generated for California, rather than less, because of an anticipated increase
in economic activity and additional revenue generated by the incentives in the
Legislation.
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 is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (i) any indebtedness approved by the voters prior to
July 1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement
of real property approved on or after July 1, 1978, 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. The California State Board of Equalization has adopted regulations,
binding on county assessors, interpreting the meaning of "change in ownership"
and "new construction" for purposes of determining full cash value of property
under Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) 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 of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282 which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" 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.
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At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. Commencing with the 1988-89 fiscal year, state monies to support
school districts and community college districts shall equal or exceed the
lesser of (i) an amount equalling the percentage of state general revenue bonds
for school and community college districts in fiscal year 1986-87, or (ii) an
amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
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 recalculates spending
limits for the State and for local governments, allows greater annual increases
in the limits, allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces 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),
removes 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, limits the amount of State tax revenue over the limit which would
be transferred to school districts and community college districts, and exempts
increased gasoline taxes and truck weight fees from the State appropriations
limit. Additionally, Proposition 111 exempts from the State appropriations limit
funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further interpretation
by both the Legislature and the courts to determine its applicability to
specific situations involving the State and local taxing authorities. Depending
upon the interpretation, Article XIIIB may limit significantly a governmental
entity's ability to budget sufficient funds to meet debt service on bonds and
other obligations.
On November 4, 1986, California voters approved an initiative statute
known as Proposition 62. This initiative (i) 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, (ii)
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, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) 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 or be
terminated by November 15, 1988, (vii) 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 (viii) 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
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Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible 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.
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 which is approved
by voters on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
Certain Debt Obligations in which the Funds may invest 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.
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.
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Certain Debt Obligations in which the Funds may invest 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 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. 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 which the Funds may invest 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 cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage 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.
When-Issued Securities. The Funds may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of the Fund are
not invested prior to the settlement of a purchase of securities, a Fund earns
no income; however, it is intended that the Funds will be fully invested to the
extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that the Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
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appears desirable for investment reasons. At the time the Fund makes the
commitment to purchase securities on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The Trust does not believe that either Fund's net asset
value or income will be adversely affected by its purchase of securities on a
when-issued or forward delivery basis. Each Fund establishes a segregated
account in which it maintains cash, U.S. Government securities or other
high-grade debt obligations equal in value to commitments for when-issued or
forward delivery securities. Such segregated securities either will mature or,
if necessary, be sold on or before the settlement date. Neither Fund enters into
such transactions for leverage purposes.
Stand-by Commitments. Subject to the receipt of any required regulatory
authorization, a Fund may acquire "Stand-by Commitments," which will enable that
Fund to improve its portfolio liquidity by making available same-day settlements
on portfolio sales (and thus facilitate the payment of same-day payments of
redemption proceeds in federal funds). Each Fund may enter into such
transactions subject to the limitations in the rules under the 1940 Act. A
Stand-by Commitment is a right acquired by a Fund, when it purchases a municipal
obligation from a broker/dealer or other financial institution ("seller"), to
sell up to the same principal amount of such securities back to the seller, at
the Fund's option, at a specified price. Stand-by Commitments are also known as
"puts." Each Fund's investment policies permit the acquisition of Stand-by
Commitments solely to facilitate portfolio liquidity. The exercise by a Fund of
a Stand-by Commitment is subject to the ability of the other party to fulfill
its contractual commitment.
Stand-by Commitments acquired by a Fund have the following features:
(1) they are in writing and are physically held by the Fund's custodian; (2) the
Fund's rights to exercise them are unconditional and unqualified; (3) they are
entered into only with sellers which in the Adviser's opinion present a minimal
risk of default; (4) although Stand-by Commitments are not transferable,
municipal obligations purchased subject to such commitments may be sold to a
third party at any time, even though the commitment is outstanding; and (5)
their exercise price is (i) the Fund's acquisition cost (excluding the cost, if
any, of the Stand-by Commitment) of the municipal obligations which are subject
to the commitment (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date. Each Fund expects to refrain from exercising a Stand-by Commitment in the
event that the amount receivable upon exercise of the Stand-by Commitment is
significantly greater than the then current market value of the underlying
municipal obligations, determined as described in the section entitled "Net
Asset Value," in order to avoid imposing a loss on a seller and thus
jeopardizing a Fund's business relationship with that seller.
Each Fund expects that Stand-by Commitments generally are available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, each Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of nonfundamental policy,
the total amount "paid" by a Fund in either manner for outstanding Stand-by
Commitments will not exceed one-half of 1% of the value of the total assets of
that Fund calculated immediately after any Stand-by Commitment is acquired. If
the Fund pays additional consideration for a Stand-by Commitment, the yield on
the security to which the Stand-by Commitment relates will, in effect, be lower
than if the Fund had not acquired such Stand-by Commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a Stand-by Commitment. Therefore, it is expected that the Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the Stand-by Commitment is less than
the exercise price of the Stand-by Commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a Stand-by Commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company is the owner of tax-exempt municipal obligations
acquired subject to a put option. The IRS has also issued private letter rulings
to certain taxpayers (which do not serve as precedent for other taxpayers) to
the effect that tax-exempt interest received by a regulated investment company
with respect to such obligations is tax-exempt in the hands of the company and
may be distributed to its shareholders as exempt-interest dividends. The IRS has
subsequently announced that it will not ordinarily issue advance ruling letters
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as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each Fund intends to take the position that
it is the owner of any municipal obligations acquired subject to a Stand-By
Commitment and that tax-exempt interest earned with respect to such municipal
obligations is tax-exempt in its hands. There is no assurance that the IRS will
agree with such position in any particular case. There is no assurance that
Stand-by Commitments will be available to a Fund nor has either Fund assumed
that such commitments would continue to be available under all market
conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund, at specified intervals, (not exceeding 397 calendar days in the
case of Scudder California Tax Free Money Fund) to tender (or "put") the bonds
to the institution and receive the face value thereof (plus accrued interest).
These third party puts are available in several different forms, may be
represented by custodial receipts or trust certificates and may be combined with
other features such as interest rate swaps. The Fund receives a short-term rate
of interest (which is periodically reset), and the interest rate differential
between that rate and the fixed rate on the bond is retained by the financial
institution. The financial institution granting the option does not provide
credit enhancement, and in the event that there is a default in the payment of
principal, or interest on, or downgrading of, a bond to below investment grade,
or a loss of the bond's tax-exempt status, the put option will terminate
automatically, and the risk to the Fund will be that of holding such a long-term
bond and, in the case of Scudder California Tax Free Money Fund, the weighted
average maturity of the Fund's portfolio would be adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-by
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations are tax-exempt in its hands. There is no assurance that the IRS will
agree with such position in any particular case. Additionally, the federal
income tax treatment of certain other aspects of these investments, including
the treatment of tender fees and swap payments, in relation to various regulated
investment company tax provisions is unclear. However, the Adviser intends to
manage the Funds' portfolios in a manner designed to minimize any adverse impact
from these investments.
Repurchase Agreements. The Funds may enter into repurchase agreements with any
member bank of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting Government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the Funds may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to a Fund (which is taxable) is unrelated to the interest rate
on the Obligation itself. Obligations will be held by the custodian or in the
Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the Obligation before repurchase of the Obligation under a
repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the Obligation. If the court characterized the transaction as a loan
and a Fund has not perfected an interest in the Obligation, that Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund is at risk of
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losing some or all of the principal and income involved in the transaction. As
with any unsecured debt obligation purchased for each Fund, the Adviser seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the Obligation, in which case the
Fund may incur a loss if the proceeds to the Fund of the sale to a third party
are less than the repurchase price. However, if the market value of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), each Fund will direct the seller of the Obligation
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement will equal or exceed the repurchase price.
It is possible that a Fund will be unsuccessful in seeking to enforce the
seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. The Funds may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. Each Fund
maintains a segregated account, as described under "When-Issued Securities" in
connection with outstanding reverse repurchase agreements. Reverse repurchase
agreements are deemed to be borrowings subject to each Fund's investment
restrictions applicable to that activity. Each Fund will enter into reverse
repurchase agreements only when the Adviser believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction. Each Fund does not intend to
invest more than 5% of its net assets in reverse repurchase agreements.
Trustees' Power to Change Objectives and Policies
Except as specifically stated to the contrary, the objectives and
policies of the Funds stated above may be changed by the Trustees without a vote
of the shareholders.
Investment Restrictions
Unless specified to the contrary, the following restrictions may not
be changed by a Fund without the approval of a majority of the outstanding
voting securities of that Fund which, under the 1940 Act and the rules
thereunder and as used in this Statement of Additional Information, means the
lesser of (1) 67% or more of the voting securities of a Fund present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
that Fund are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of a Fund. Any investment restrictions herein
which involve a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, the Trust may not, on behalf of each
Fund:
(1) borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Fund maintains asset
coverage of 300% for all borrowings;
(2) purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate or
mortgages and (ii) securities secured by real estate or
interests therein, and the Trust, on behalf of Scudder
California Tax Free Fund only, reserves freedom of action to
hold and to sell real estate acquired as a result of Scudder
California Tax Free Fund's ownership of securities); and the
Trust, on behalf of each Fund, may not purchase or sell
physical commodities or contracts relating to physical
commodities;
(3) act as underwriter of the securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of the
Funds;
(4) make loans to other persons, except (a) loans of portfolio
securities and (b) to the extent the purchase of debt
securities in accordance with its investment objective and
investment policies and the entry into repurchase agreements
may be deemed to be loans;
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(5) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for
shares of the separate classes or series of the Trust,
provided, in the case of Scudder California Tax Free Fund
only, that collateral arrangements with respect to
currency-related contracts, futures contracts, options or
other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction;
(6) purchase (a) private activity bonds, or (b) securities which
are neither municipal obligations nor securities of the U.S.
Government, its agencies or instrumentalities, if in either
case the purchase would cause more than 25% of the market
value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers having their
principal business activities in the same industry (for the
purposes of this restriction, telephone companies are
considered to be in a separate industry from gas and electric
public utilities, and wholly-owned finance companies are
considered to be in the industry of their parents if their
activities are primarily related to financing the activities
of their parents); or
(7) (Scudder California Tax Free Money Fund only) invest more than
25% of the value of its total assets in the securities of any
one issuer;
As a matter of nonfundamental policy, the Trust, on behalf of each
Fund, may not:
(a) purchase or retain securities of any open-end investment
company, or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event the Fund may not purchase
more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets
in another investment company, and may not invest more than
10% of its assets in other investment companies;
(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(c) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer, director or trustee of the Trust or a member,
officer, director or trustee of the investment adviser of the
Trust if one or more of such individuals owns beneficially
more than one-half of one percent (1/2%) of the outstanding
shares or securities or both (taken at market value) of such
issuer and such individuals owning more than one-half of one
percent (1/2%) of such shares or securities together own
beneficially more than 5% of such shares or securities or
both;
(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions, except in connection with
arbitrage transactions (for Scudder California Tax Free Fund
only,) and except that the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of securities;
(e) invest more than 10% of its net assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days and the Fund will not invest more
than 5% of its total assets in restricted securities;
(f) purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors
(except U.S. Government securities, securities of such issuers
which are rated by at least one nationally recognized
statistical rating organization, municipal obligations and
obligations issued or guaranteed by any foreign Government or
its agencies or instrumentalities, if such purchase would
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cause the investments of the Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market
value;
(g) (Scudder California Tax Free Fund only) purchase from or sell
to any of the Trust's officers or Trustees, its investment
adviser, its principal underwriter or the officers and
Directors of its investment adviser or principal underwriter,
portfolio securities of the Fund;
(h) (Scudder California Tax Free Fund only) buy options on
securities or financial instruments, unless the aggregate
premiums paid on all such options held by the Fund at any time
do not exceed 20% of its net assets; or sell put options on
securities if, as a result, the aggregate value of the
obligations underlying such put options would exceed 50% of
the Fund's net assets;
(i) (Scudder California Tax Free Fund only) enter into futures
contracts or purchase options thereon unless immediately after
the purchase, the value of the aggregate initial margin with
respect to all futures contracts entered into on behalf of the
Fund and the premiums paid for options on futures contracts
does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(j) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which
own or invest in such interests);
(k) borrow money (including reverse repurchase agreements), except
for temporary or emergency purposes, in excess of 5% of its
total assets (taken at market value) or borrow other than from
banks;
(l) (Scudder California Tax Free Fund only) purchase warrants if
as a result warrants taken at the lower of cost or market
value would represent more than 5% of the value of the Fund's
total net assets or more than 2% of its net assets in warrants
that are not listed on the New York or American Stock
Exchanges or on an exchange with comparable listing
requirements (for this purpose, warrants attached to
securities will be deemed to have no value);
(m) (Scudder California Tax Free Money Fund only) purchase
warrants, unless attached to other securities in which it is
permitted to invest;
(n) invest more than 25% of its total assets in municipal
obligations the security of which is derived from any one of
the following categories: hospitals and health facilities;
turnpikes and toll roads; ports and airports; or colleges and
universities;
(o) enter into Stand-by Commitments if, the total amount "paid" by
a Fund in either manner for outstanding Stand-by Commitments
will not exceed 1/2 of 1% of the value of the total assets of
that Fund calculated immediately after any Stand-by Commitment
is acquired;
(p) purchase or sell real estate limited partnership interests; or
(q) make securities loans unless all loans of portfolio securities
are fully collateralized and marked to market daily.
PURCHASES
(See "Purchases" and "Transaction information" in the Funds' prospectus.)
Additional Information about Opening an Account
Shareholders of other Scudder funds who have submitted an account
application and have a certified tax identification number, clients having a
regular investment counsel account with Scudder or its affiliates and members of
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their immediate families, officers and employees of Scudder or of any affiliated
organization and their immediate families, members of the National Association
of Securities Dealers, Inc. ("NASD"), and banks may open an account by wire.
These investors must call 1-800-225-5163 to get an account number. During the
call, the investor will be asked to indicate the Fund name, amount to be wired
($1,000 minimum), name of bank or trust company from which the wire will be
sent, the exact registration of the new account, the tax identification number
or Social Security number, address and telephone number. The investor must then
call the bank to arrange a wire transfer to State Street Bank, Attention: Mutual
Funds, 225 Franklin Street, Boston, MA 02110. The investor must give the Scudder
fund name, account name and the new account number. Finally, the investor must
send a completed and signed application to the Fund promptly.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves
uncollectible, that Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancelation. If the purchaser is a
shareholder, the Trust shall have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
To purchase shares of Scudder California Tax Free Fund and obtain the
same day dividend you must have your bank forward federal funds by wire transfer
and provide the required account information so as to be available to the Fund
prior to twelve o'clock noon eastern time on that day. If you wish to make a
purchase of $500,000 or more you should notify the Fund's transfer agent,
Scudder Service Corporation (the "Transfer Agent") of such a purchase by calling
1-800-225-5163. If either the federal funds or the account information is
received after twelve o'clock noon eastern time, but both the funds and the
information are made available before the close of regular trading on the New
York Stock Exchange (the "Exchange") (normally 4 p.m. eastern time) on any
business day, shares will be purchased at net asset value determined on that day
but will not receive the dividend; in such cases, dividends commence on the next
business day.
In the case of Scudder California Tax Free Money Fund, to obtain the
net asset value determined as of twelve o'clock noon and the same day dividend
your bank must forward federal funds by wire transfer and provide the required
account information so as to be available to the Fund prior to twelve o'clock
noon eastern time on that day. If the federal funds are made available or the
account information is received after twelve o'clock noon eastern time but both
the funds and the information are made available before the close of regular
trading on the Exchange, normally 4 p.m. eastern time, on any day, shares will
be purchased at the net asset value determined as of the close of trading on
that day but will not receive the dividend; in such cases, dividends commence on
the next business day.
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently the Funds pay a fee for receipt by State Street Bank
and Trust Company (the "Custodian") of "wired funds" but the right to charge
investors for this service is reserved.
Boston banks are presently closed on certain holidays although the
Exchange may be open. These holidays include Martin Luther King, Jr. Day (the
3rd Monday in January), Columbus Day (the 2nd Monday in October) and Veterans
Day (November 11). Investors are not able to purchase shares by wiring federal
funds on such holidays because the Custodian is not open to receive such federal
funds on behalf of a Fund.
Share Price
Purchases are filled without sales charge at the net asset value next
computed after receipt of the purchase order in good order. Net asset value for
Scudder California Tax Free Money Fund normally is computed twice a day, as of
twelve o'clock noon and the close of regular trading on each day when the
Exchange is open for trading. Net asset value for Scudder California Tax Free
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<PAGE>
Fund normally is computed once a day, as of the close of regular trading on each
day when the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange are executed at the next business day's net
asset value. If the order has been placed by a member of the NASD other than
Scudder Investor Services, Inc., it is the responsibility of that member broker,
rather than a Fund, to forward the purchase order to the Funds' transfer agent
in Boston by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Funds' management to afford ease of
redemption, certificates are not issued to indicate ownership in the Funds.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancelation and credit to such shareholder's account. Shareholders who
prefer may hold the certificates in their possession until they wish to exchange
or redeem such shares.
Other Information
If purchases or redemptions of Fund shares are arranged and settlement
is made at an investor's election through a member of the NASD other than the
Scudder Investor Services, Inc., that member may, at its discretion, charge a
fee for that service. The Trustees and Scudder Investor Services, Inc., the
Funds' principal underwriter, each has the right to limit the amount of
purchases by, and to refuse to sell to any person, and may suspend or terminate
the offering of shares of each Fund at any time.
The "Tax Identification Number" section of the Application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status) may be
returned to the investor.
A Fund may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company (or series thereof) or personal holding company, subject to the
requirements of the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information"
in the Funds' prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be an
additional investment into an existing account or may involve opening a new
account in the other fund. When an exchange involves a new account, the new
account is established with the same registration, Tax Identification Number,
address, telephone redemption option, "Scudder Automated Information Line"
(SAIL) transaction authorization and dividend option as the existing account.
Other features do not carry over automatically to the new account. Exchanges to
a new fund account must be for a minimum of $1,000. When an exchange represents
an additional investment into an existing account, the account receiving the
exchange proceeds must have identical registration, tax identification number,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more. If the account receiving the
exchange proceeds is different in any respect, the exchange request must be in
writing and must contain a signature guarantee as described under "Transaction
information -- Redeeming shares -- Signature guarantees" in the Funds'
prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily are executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by phone or in
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<PAGE>
writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares, and therefore
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Trust 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 Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "The Scudder Family of Funds" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated.
Redemption by Telephone
In order to request redemptions by telephone, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which the redemption proceeds are to be sent.
Shareholders currently receive the right, automatically without having to elect
it, to redeem up to $50,000 and have the proceeds mailed to their address of
record. Shareholders may request to have the proceeds mailed or wired to their
predesignated bank account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section
on the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a designated bank account or who want to change
the bank account previously designated to receive redemption
proceeds 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.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve Bank wire to the bank
account designated on the application unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Trust 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 Trust does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Trust will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
34
<PAGE>
Redemption requests by telephone (technically a repurchase agreement
between the Fund and the shareholder) of shares purchased by check are not
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with a signature(s) guaranteed as explained in the
Funds' prospectus.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares or share certificates
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption are sent within seven business days after
receipt by the Transfer Agent of a request for redemption that complies with the
above requirements. Delays of more than seven business days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
Redemption by Write-A-Check
All new investors and existing shareholders of Scudder California Tax
Free Money Fund who apply to the Custodian for checks may use them to pay any
person, provided that each check is for at least $100 and not more than $5
million. By using the checks, the shareholder receives daily dividend credit on
his or her shares until the check has cleared the banking system. Investors who
purchased shares by check may write checks against those shares only after they
have been on the Fund's books for seven business days. Shareholders who use this
service may also use other redemption procedures. No shareholder may write
checks against certificated shares. Scudder California Tax Free Money Fund pays
the bank charges for this service. However, Scudder California Tax Free Money
Fund reviews the cost of operation periodically and reserves the right to
determine if direct charges to the persons who avail themselves of this service
are appropriate.
Checks are returned by the Custodian if there are insufficient shares
to meet the withdrawal amount. Possible fluctuations in the per share value of
the Fund should be considered in determining the amount of the check. An
investor should not attempt to close an account by check, because the exact
balance at the time the check clears cannot be known when the check is written.
The Trust, on behalf of Scudder California Tax Free Money Fund, Scudder Service
Corporation and the Custodian each reserves the right at any time to suspend or
terminate the "Write-A-Check" procedure.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives, in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than a shareholder's cost depending upon the
net asset value at the time of redemption or repurchase. The Trust does not
impose a redemption or repurchase charge, although a wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemptions of shares, including redemptions undertaken to effect an exchange
for shares of another Scudder fund, may result in tax consequences (gain or
loss) to the shareholder and the proceeds of such redemptions may be subject to
backup withholding. (See "TAXES.")
The determination of net asset value may be suspended at times and a
shareholders right to redeem shares and to receive payment therefor may be
suspended at times during which (a) the Exchange is closed, other than customary
35
<PAGE>
weekend and holiday closings, (b) trading on the Exchange is restricted for any
reason, (c) an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for a Fund fairly to determine the value of its net assets, or (d)
the SEC by order permits a suspension of the right of redemption or a
postponement of the date of payment or redemption; provided that applicable
rules and regulations of the SEC (or any succeeding Governmental authority)
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
If transactions at any time reduce a shareholder's account balance in
the Fund to below $1,000 in value, such Fund notifies the shareholder that,
unless the account balance is brought up to at least $1,000, the Trust will
redeem all shares, close the account, and send redemption proceeds to the
shareholder. The shareholder has sixty days to bring the account balance up to
$1,000 before any action is taken by the Trust. No transfer from an existing
account to a new fund account may be for less than $1,000 or the new account
will be redeemed as described above. (This policy applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.) The Trustees
have the authority to change the minimum account size.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "Shareholder benefits" in the Funds' prospectus)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its 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 NASD
Rules of Fair Practice, a mutual fund can call itself a "no-load" fund only if
the 12b-1 fee and/or service fee does not exceed 0.25% of a fund's average
annual net assets.
Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual 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.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
36
<PAGE>
<TABLE>
<CAPTION>
Scudder Load Fund with 0.75% No-Load Fund with
YEARS Pure No-Load(TM)Fund 8.50% Load Fund 12b-1 Fee 0.25% 12b-1 Fee
----- -------------------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
</TABLE>
Investors are encouraged to review the fee tables on page 2 of the
Funds' prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. See "How to contact Scudder" in the prospectus for the address. Please
include your account number with your written request.
Reinvestment is usually made on the day following the record date.
Investors may leave standing instructions with the Transfer Agent designating
their option for either reinvestment or cash distribution of any income
dividends or capital gains distributions. If no election is made, dividends and
distributions will be invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Funds Centers
Investors may visit any of the Fund Centers maintained by Scudder
Investor Services, Inc. and listed in the Funds' prospectus. The Centers are
designed to provide individuals with services during any business day. Investors
may pick up literature, or find assistance with opening an account, adding
monies or special options to existing accounts, making exchanges within the
Scudder Family of Funds, redeeming shares or opening retirement plans. Checks
should not be mailed to the Centers but should be mailed to "The Scudder Funds"
at the address listed under "How to Contact Scudder" in the prospectus.
37
<PAGE>
Reports to Shareholders
Each Fund issues to shareholders unaudited semiannual financial
statements and annual financial statements audited by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets and financial highlights for each Fund.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate-and long-term
bonds.
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<PAGE>
Scudder Short Term Global Income Fund seeks to provide high current
income from a portfolio of high-grade money market instruments and
short-term bonds denominated in foreign currencies and the U.S. dollar.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
- ------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
39
<PAGE>
Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.
Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S.
and foreign issuers. Income is an incidental consideration.
Scudder Global Small Company Fund seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
- ------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment in
Japanese securities, primarily in common stocks of Japanese companies.
The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
Scudder Service Representative; easy telephone exchanges into Scudder money
market, tax free, income, and growth funds; shares redeemable at net asset value
at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By
Automatic Withdrawal Plan" in the Funds' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to the IRS requirements, may be obtained by contacting Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103 or by
calling toll free, 1-800-225-2470. It is advisable for an investor considering
the funding of the investment plans described below to consult with an attorney
or other investment or tax adviser with respect to the suitability requirements
and tax aspects thereof.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of the Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Payments are mailed at the
end of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Funds' prospectus. Any such requests must
be received by the Fund's transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.
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An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Cash Management System -- Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.
In its discretion, a Fund may accept minimum initial investments of
less than $1,000 (per Fund) as part of a continuous group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments, employee benefit
plans) provided that the average single account in any one Fund or Portfolio in
the group purchase plan will be $1,000 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $1,000 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan ("AIP") involves an investment strategy
called dollar cost averaging. Dollar cost averaging is a method of investing
whereby a specific dollar amount is invested at regular intervals. Such a plan
involves continuous investment in securities regardless of fluctuating price
levels of such securities. By investing the same dollar amount each period, when
shares are priced low the investor will purchase more shares than when the share
price is higher. Over a period of time this investment approach may allow the
investor to reduce the average price of the shares purchased. However, this
investment approach does not assure a profit or protect against loss. This type
of investment program may be suitable for various investment goals such as, but
not limited to, college planning or saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through AIP. In this
case, the minimum initial investment is $500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and performance
information-- Dividends and capital gains
distributions" in the Funds' prospectus.)
Each Fund follows the practice of distributing substantially all, and
in no event less than 90% of its net investment income (defined under
"ADDITIONAL INFORMATION--Glossary") and any excess of net realized short-term
capital gains over net realized long-term capital losses. Each Fund may follow
the practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses. However, if it appears to be
42
<PAGE>
in the best interest of a Fund and its shareholders, such Fund may retain all or
part of such gain for reinvestment.
Dividends are declared daily and distributions from net investment
income are made monthly. Any dividends or capital gains distributions declared
in October, November or December with a record date in such a month and paid
during the following January are treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared.
Distributions from net short-term and net long-term capital gains realized
during each fiscal year, if any, are made annually within three months after the
end of the Funds' fiscal year end. An additional distribution may be made (or
treated as made) in November or December if necessary to avoid the excise tax
described under "TAXES." Both types of distributions are made in shares of the
Funds and confirmations are mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check is sent.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
percentage of the prior calendar year's distributions which the Fund has
designated as tax-exempt and the percentage of such tax-exempt distributions
treated as a tax-preference item for purposes of the alternative minimum tax.
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Funds' prospectus.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year, five years and the life of the Fund, where
applicable, all ended on the last day of a recent calendar quarter. Average
annual total return quotations reflect changes in the price of the Funds' shares
and assume that all dividends and capital gains distributions during the
respective periods were reinvested in Fund shares. Average annual total return
is calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^(1/n) - 1
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Average Annual Total Return for periods ended March 31, 1995
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder California Tax Free Money Fund 2.72% 3.06% - 3.76%(1)
Scudder California Tax Free Fund 6.75% 8.39% 9.25% -
(1) For the period beginning May 28, 1987 (commencement of operations)
</TABLE>
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<PAGE>
Cumulative Total Return
Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect the change in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P)-1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return for periods ended March 31, 1995
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder California Tax Free Money Fund 2.72% 16.26% - 33.61%(1)
Scudder California Tax Free Fund 6.75% 49.62% 142.25% -
(1) For the period beginning May 28, 1987 (commencement of operations)
</TABLE>
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
Yield
Yield for Scudder California Tax Free Money Fund is the net annualized
yield based on a specified seven calendar days calculated at simple interest
rates. Yield is calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return. The yield is annualized by multiplying the base period return by
365/7. The yield figure is stated to the nearest hundredth of one percent. The
yield of the Fund for the seven-day period ended March 31, 1995 was 3.52%.
Yield for Scudder California Tax Free Fund is the net annualized SEC
yield based on a specified 30-day (or one month) period assuming a semiannual
compounding of income. Yield is calculated by dividing the net investment income
per share earned during the period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6-1]
Where:
a = dividends and interest earned during the period
including the amortization of market premium or
accretion of market discount.
b = expenses accrued for the period (net of
reimbursements).
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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.
The 30-day net annualized SEC yield of the Fund for the period ended
March 31, 1995 was 5.03%.
Effective Yield
Effective Yield for Scudder California Tax Free Money Fund is the net
annualized yield for a specified seven calendar days assuming a reinvestment of
the income or compounding. Effective yield is calculated by the same method as
yield except the yield figure is compounded by adding one, raising the sum to a
power equal to 365 divided by seven, and subtracting one from the result,
according to the following formula:
Effective Yield = [(Base Period Return + 1)^(365/7)] - 1
The effective yield of the Fund for the seven-day period ended March
31, 1995 was 3.58%.
Tax-Equivalent Yield
Tax-Equivalent Yield for Scudder California Tax Free Money Fund is the
net annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified seven day period assuming a reinvestment of
all dividends paid during such period. Tax-equivalent yield is calculated by
dividing that portion of the Fund's yield (as computed in the yield description
above) which is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the yield of the Fund that is not
tax-exempt.
Thus, taxpayers with an effective combined marginal income tax rate of
42.40% would need to earn a taxable yield of 6.22% to receive the after-tax
income equal to the 3.58% tax-free effective yield of Scudder California Tax
Free Money Fund for the seven-day period ended March 31, 1995.
Tax-Equivalent Yield for Scudder California Tax Free Fund is the net
annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified 30-day (or one month) period assuming
semiannual compounding of income. Tax-equivalent yield is calculated by dividing
that portion of the Fund's yield (as computed in the yield description above)
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. Thus,
taxpayers with an effective combined marginal income tax rate of 42.40% would
have to earn 8.73% to receive the after-tax income equal to the 5.03% tax-free
yield of Scudder California Tax Free Fund for the 30-day period ended March 31,
1995.
Quotations of a Fund's performance are historical, show the performance
of a hypothetical investment and are not intended to indicate future
performance. Performance of the Fund will vary based on changes in market
conditions and the level of the Fund's expenses. An investor's shares when
redeemed may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not
insured.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
45
<PAGE>
Stock Price Index ("S&P 500"), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
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<PAGE>
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
47
<PAGE>
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national business weekly that periodically reports
mutual fund performance data.
Value Line Mutual Funds Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. national newspaper which
regularly covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
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<PAGE>
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
The Funds are series of Scudder California Tax Free Trust. The Trust is
a Massachusetts business trust established under a Declaration of Trust dated
May 3, 1983. Such Declaration of Trust was amended and restated on December 8,
1987. Its authorized capital consists of an unlimited number of shares of
beneficial interest of $.01 par value. The shares are currently divided into two
series. Each share of each Fund has equal rights with each other share of that
Fund as to voting, dividends and liquidation. Shareholders have one vote for
each share held on matters on which they are entitled to vote. All shares issued
and outstanding are fully paid and nonassessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Funds'
prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trustees, in their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution. The Trustees have no present
intention of taking the action necessary to effect the division of shares into
separate classes (which under present regulations requires the Fund first to
obtain an exemptive order of the SEC), or of changing the method of distribution
of shares of the Fund.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers are not liable for errors of judgment or mistakes
of fact or law, and that the Trust indemnifies its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Trust except if it is
determined in the manner provided in the Declaration of Trust that they have not
acted in good faith in the reasonable belief that their actions were in the best
interests of the Trust. However, nothing in the Declaration of Trust protects or
indemnifies a Trustee or officer against any liability 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
or her office.
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INVESTMENT ADVISER
(See "Fund organization-Investment adviser" in the
Funds' prospectus.)
Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to the Funds. This organization is one of the most
experienced investment management firms in the United States. It was established
as a partnership in 1919 and pioneered the practice of providing investment
counsel to individual clients on a fee basis. In 1928, it introduced the first
no-load mutual fund to the public. In 1953, the Adviser introduced Scudder
International Fund, the first mutual fund available in the U.S. investing
internationally in several foreign countries. The firm reorganized from a
partnership to a corporation on June 28, 1985.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Securities Trust, Scudder Equity Trust, Scudder Fund, Inc., Scudder Funds Trust,
Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund,
Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The Latin America Dollar
Income Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $11 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
In selecting the securities in which the Funds may invest, the
conclusions and investment decisions of the Adviser with respect to the Funds
are based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from broker/dealers who may execute portfolio
transactions for the Adviser's clients. However, the Adviser regards this
information and material as an adjunct to its own research activities.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions are allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to a Fund.
The Investment Management Agreements (the "Agreements") for each Fund
are dated December 12, 1990. The Agreements were most recently approved by the
Trustees on August 9, 1994 and by the shareholders of the Funds on December 11,
1990 and will continue in effect until September 30, 1995. The Agreements will
continue in effect thereafter by its terms from year to year only so long as its
continuance is specifically approved at least annually by the vote of a majority
of those Trustees who are not parties to such Agreements or "interested persons"
of the Adviser or the Trust cast in person at a meeting called for the purpose
of voting on such approval and either by vote of the majority of the Trustees or
a majority of the outstanding voting securities of each Fund. The Agreements may
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be terminated at any time without payment of penalty by either party on sixty
days' written notice, and automatically terminates in the event of its
assignment.
Under the Agreements, the Adviser regularly provides each Fund with
continuing investment management consistent with each Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for each Fund's portfolio, what securities shall be held or sold by
each Fund, and what portion of each Fund's assets shall be held uninvested,
subject always to the provisions of the Trust's Declaration of Trust and
By-Laws, of the 1940 Act and of the Internal Revenue Code of 1986 and to each
Fund's investment objectives, policies and restrictions, and subject further to
such policies and instructions as the Trustees of the Trust may from time to
time establish. The Adviser also advises and assists the officers of the Trust
in taking such steps as are necessary or appropriate to carry out the decisions
of its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Trust.
Under the Agreements, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Trust's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to each Fund (such as the Transfer Agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of each
Fund's federal, state and local tax returns; preparing and filing each Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of each Fund under applicable
federal and state securities laws; maintaining each Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of each Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring each Fund's operating budget;
processing the payment of each Fund's bills; assisting each Fund in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting each Fund in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those of
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all affiliated Trustees, officers and executive employees of
the Trust and makes available, without expense to the Trust, the services of
such of the Adviser's directors, officers and employees as may duly be elected
officers of the Trust, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office space and
facilities.
For these services, Scudder California Tax Free Fund pays an annual fee
of 0.625 of 1% of the first $200 million of average daily net assets of such
Fund and 0.60 of 1% of such net assets in excess of $200 million, and Scudder
California Tax Free Money Fund pays an annual fee of 0.50 of 1% of the average
daily net assets of such Fund. The fees are payable monthly, provided the Funds
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Funds and unpaid.
For the fiscal years ended March 31, 1995, 1994 and 1993 the investment
management fees incurred by Scudder California Tax Free Fund were $1,861,185,
$2,087,343 and $1,680,324, respectively. The investment management fees incurred
by Scudder California Tax Free Money Fund were $180,098, $112,218 and $136,613,
respectively.
With respect to Scudder California Tax Free Money Fund, the Adviser has
agreed to continue not to impose all or a portion of its management fee and to
take other action, (to the extent necessary) until July 31, 1996, and during
such time to maintain the annualized expenses at not more than 0.60% of average
daily net assets. For the fiscal year ended March 31, 1995, the Adviser did not
impose a portion of the fee which would have amounted to $162,146.
Under the Agreements, the Funds are responsible for all of their other
expenses, including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing or
accounting expenses; taxes and governmental fees; the fees and expenses of the
Transfer Agent; any other expenses, including clerical expenses of issue, sale,
underwriting, distribution, redemption or repurchase of shares; the expenses of
and fees for registering or qualifying securities for sale; the fees and
expenses of the Trustees, officers and employees of the Fund who are not
affiliated with the Adviser; the cost of printing and distributing reports and
51
<PAGE>
notices to shareholders; and the fees or disbursements of custodians. Each Fund
may arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of such Fund. The Trust is also
responsible for its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees with respect thereto.
Each Agreement requires the Adviser to return to each Fund all or a
portion of advances of its management fee to the extent annual expenses of such
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which such Fund's shares are offered for sale.
Management has been advised that, while most states have eliminated expense
limitations, the lowest of such limitations is currently 2 1/2% of average daily
net assets up to $30 million, 2% of the next $70 million of average daily net
assets and 1 1/2% of average daily net assets in excess of that amount. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations.
Any such fee advance required to be returned to a Fund is returned as
promptly as practicable after the end of the Funds' fiscal year. However, no fee
payment is made to the Adviser during any fiscal year which causes year-to-date
expenses to exceed the cumulative pro rata expense limitation at the time of
such payment. The amortization of organizational costs is described herein under
"ADDITIONAL INFORMATION--Other Information."
The Agreements also provide that the Trust may use any name derived
from the name "Scudder, Stevens & Clark" only as long as the Agreements or any
extension, renewal or amendment thereof remains in effect.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at the Trust's expense.
Each Agreement provides that the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by a Fund in connection with
matters to which the Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Custodian. It is the Adviser's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Trust
relationships.
None of the Trustees or officers of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of the Funds.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
52
<PAGE>
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Principal Occupation** Scudder Investor
Name and Address Position with Trust and Affiliations Services, Inc.
- ---------------- ------------------- ---------------- --------------
<S> <C> <C> <C>
David S. Lee*++@ President and Trustee Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director
Henry P. Becton, Jr.++ Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Dawn-Marie Driscoll Trustee Attorney and Corporate Director; --
5760 Flamingo Drive Partner, Palmer & Dodge, from
Cape Coral, FL 33904 1988 to 1990
Peter B. Freeman++ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
Daniel Pierce*++@ Trustee Chairman of the Board and Vice President,
Managing Director of Scudder, Director and
Stevens & Clark, Inc. Assistant Treasurer
Olin Barrett Vice President Managing Director of Scudder, --
333 South Hope Street Stevens & Clark, Inc.
Los Angeles, CA 90071
Donald C. Carleton@ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Thomas W. Joseph@ Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer
and Assistant Clerk
Thomas F. McDonough@ Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath@ Vice President and Principal of Scudder, Stevens & --
Treasurer Clark, Inc.
Edward J. O'Connell+ Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Coleen Downs Dinneen@ Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
53
<PAGE>
* Messrs. Lee and Pierce are considered by the Trust and its counsel to
be Trustees who are "interested persons" of the Adviser or of the
Trust, within the meaning of the Investment Company Act of 1940, as
amended.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
++ Messrs. Becton, Freeman, Lee and Pierce are members of the Executive
Committee which has the power to declare dividends from ordinary income
and distributions of realized capital gains to the same extent as the
Board is so empowered.
+ Address: 345 Park Avenue, New York, New York 10154
@ Address: Two International Place, Boston, Massachusetts 02110
</TABLE>
As of June 30, 1995, all Trustees and officers of the Trust as a group
owned beneficially (as defined in Section 13(d) of the Securities Exchange Act
of 1934) less than 1% of Scudder California Tax Free Money Fund and less than 1%
of Scudder California Tax Free Fund.
Certain accounts for which the Adviser acts as investment adviser owned
5,051,335 shares in the aggregate, or 7.83% of the outstanding shares of Scudder
California Tax Free Money Fund. The Adviser may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
Certain accounts for which the Adviser acts as investment adviser owned
1,544,417 shares in the aggregate, or 5.33%, of the outstanding shares of
Scudder California Tax Free Fund. The Adviser may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
To the best of the Funds' knowledge, as of June 30, 1995, no person
owned beneficially more than 5% of each Fund's outstanding shares except as
stated above.
The Trustees and officers of the Trust also serve in similar capacities
with other Scudder Funds.
REMUNERATION
Several of the officers and Trustees of the Trust also may be officers
of the Adviser, Scudder Investor Services, Inc., Scudder Service Corporation,
Scudder Trust Company or Scudder Fund Accounting Corporation and participate in
fees paid to the Adviser. The Trust pays no direct remuneration to any officer
of the Trust. However, each of the Trust's Trustees who is not affiliated with
the Adviser will be business). Each of these unaffiliated Trustees receives an
annual Trustee's fee of $4,000 from the Trust, allocated equally among the
series of the Trust and fees of $300 for each attended Trustees' meeting, audit
committee meeting or meeting held for the purpose of considering arrangements
between the Trust and the Adviser or any affiliates. Each unaffiliated Trustee
also receives $100 per committee meeting, other than those set forth above,
attended. For the fiscal year ended March 31, 1995, such fees totaled $14,177
for Scudder California Tax Free Fund and $14,177 for Scudder California Tax Free
Money Fund.
The following Compensation Table provides, in tabular form, the following data:
Column (1): all Trustees who receive compensation from the Trust.
Column (2): aggregate compensation received by a Trustee from all the series of
the Trust.
Columns (3) and (4): pension or retirement benefits accrued or proposed be paid
by the Trust. Scudder California Tax Free Trust does not pay its Trustees such
benefits.
Column (5): total compensation received by a Trustee from the Trust, plus
compensation received from all funds for which a Trustee serves in a fund
complex. The total number of funds from which a Trustee receives such
compensation is also provided.
54
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994
===================== ============================== ==================== ===================== =========================
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation From
Aggregate Compensation Benefits Accrued Estimated Annual Scudder California Tax
Name of Person, from Scudder California As Part of Fund Benefits Upon Free Trust and Fund
Position Tax Free Trust* Expenses Retirement Complex Paid to Trustee
===================== ============================== ==================== ===================== =========================
<S> <C> <C> <C> <C>
Henry P. Becton, Jr., $9,000 N/A N/A $90,597
Trustee (15 funds)
Dawn-Marie Driscoll, $9,000 N/A N/A $99,193
Trustee (16 funds)
Peter B. Freeman, $9,000 N/A N/A $146,243
Trustee (31 funds)
* Scudder California Tax Free Trust consists of two Funds: Scudder California Tax Free Money Fund and Scudder
California Tax Free Fund.
</TABLE>
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor") a Massachusetts corporation, which is a wholly-owned
subsidiary of the Adviser, a Delaware corporation. The Trust's underwriting
agreement dated June 1, 1987, will remain in effect until September 30, 1995,
and from year to year thereafter only if its continuance is approved annually by
a majority of the members of the Board of Trustees who are not parties to such
agreement or interested persons of any such party and either by vote of a
majority of the Board of Trustees or a majority of the outstanding voting
securities of the Trust. The underwriting agreement was last approved by the
Trustees on August 9, 1994.
Under the principal underwriting agreement, the Trust 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 Trust as a
broker/dealer in various states as required; the fees and expenses of preparing,
printing and mailing prospectuses annually to existing shareholders (see below
for expenses relating to prospectuses paid by the Distributor), notices, proxy
statements, reports or other communications to shareholders of a Fund; the cost
of printing and mailing confirmations of purchases of shares and the
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 Trust and the
Distributor.
The Distributor pays for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of a Fund to the public.
The Distributor pays all fees and expenses in connection with its qualification
and registration as a broker/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 each Fund, unless a Rule 12b-1 plan is in effect which provides that each
Fund shall bear some or all of such expenses.
Note: Although the Trust does not currently have a 12b-1 Plan and the
Trustees have no current intention of adopting one, the Trust will also
pay those fees and expenses permitted to be paid or assumed by the
Trust pursuant to a 12b-1 Plan, if any, were adopted by the Trust,
notwithstanding any other provision to the contrary in the underwriting
agreement.
55
<PAGE>
As agent the Distributor currently offers shares of each Fund on a
continuous basis to investors in all states in which shares of each Fund 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 either Fund.
TAXES
(See "Transaction information--Tax information, tax
identification number" and "Distribution and performance
information -- Dividends and capital gains
distributions" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
Federal Taxation
Each Fund within the Trust is separate for investment and accounting
purposes, and is treated as a separate taxable entity for federal income tax
purposes. Each Fund therefore has qualified and elected to be treated as a
separate regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code") and intends to continue to so qualify.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90% of
its taxable net investment income (including net short-term capital gain in
excess of net long-term capital loss) and at least 90% of its tax-exempt net
investment income and is not subject to federal income tax to the extent that it
distributes annually all of its taxable net investment income and net realized
capital gains in accordance with the timing requirements of the Code. Each Fund
intends to distribute at least annually substantially all, and in no event less
than 90% of its taxable and tax-exempt net investment income and net realized
capital gains.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, the Fund will elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a share of federal income taxes paid by a Fund on such gains as a
credit against any personal federal income tax liability, and will be entitled
to increase the adjusted tax basis of Fund shares owned by the difference
between the pro rata share of such gains and any tax credit.
Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of a Fund's taxable ordinary income for the calendar
year and at least 98% of the excess of its capital gains over capital losses
realized during the one-year period ending October 31 during such year, together
with any undistributed, untaxed amounts of ordinary income and capital gains
from the previous calendar year. Each Fund has adjusted its distribution
policies to minimize any adverse impact from this tax or eliminate its
application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward or post-October loss of a Fund. Each
Fund intends to offset realized capital gains by using their capital loss
carryforwards before distributing any capital gains. In addition, each Fund
intends to offset realized capital gains by using its post-October losses before
distributing any capital gains. As of March 31, 1995, Scudder California Tax
Free Money Fund had a net tax basis capital loss carryforward of approximately
$76,000, which may be applied against any realized net taxable capital gains of
each succeeding year until fully utilized or until March 31, 2000 ($14,000),
March 31, 2002 ($7,000) and March 31, 2003 ($55,000), the respective expiration
dates, whichever occurs first. In addition, Scudder California Tax Free Money
56
<PAGE>
Fund, from November 1, 1994 through March 31, 1995, incurred approximately
$12,000 of net realized capital losses which the Fund intends to elect to defer
and treat as arising in the fiscal year ended March 31, 1996. As of March 31,
1995, Scudder California Tax Free Fund had a net tax basis capital loss
carryforward of approximately $9,631,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until March 31, 2003, the expiration date, whichever occurs first. In
addition, Scudder California Tax Free Fund, from November 1, 1994 through March
31, 1995, incurred approximately $2,901,000 of net realized capital losses which
the Fund intends to elect to defer and treat as arising in the fiscal year ended
March 31, 1996.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50%
requirement in order to permit its distributions of tax-exempt interest to be
treated as such for federal income tax purposes in the hands of its
shareholders. Distributions to shareholders of tax-exempt interest earned by the
Fund for the taxable year are therefore not subject to federal income tax,
although they may be subject to the individual and corporate alternative minimum
taxes described below. A portion of discount from certain stripped tax-exempt
obligations or their coupons, however, may be taxable.
The Revenue Reconciliation Act of 1993 requires that market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds purchased after April 30, 1993. A market discount
bond is a bond acquired in the secondary market at a price below its redemption
value. Under prior law, the treatment of market discount as ordinary income did
not apply to tax-exempt obligations. Instead, realized market discount on
tax-exempt obligations was treated as capital gain. Under the new law, gain on
the disposition of a tax-exempt obligation or any other market discount bond
that is acquired for a price less than its principal amount will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount. This rule is effective only for bonds purchased after April 30, 1993.
Since no portion of either Fund's income is comprised of dividends from
domestic corporations, none of the income distributions of a Fund are eligible
for the dividends-received deduction available for certain taxable dividends
received by corporations.
Distributions of the excess of net long-term capital gains over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of a Fund have been held by such
shareholders. Such distributions to corporate shareholders of a Fund are not
eligible for the dividends-received deduction. Any loss realized upon the
redemption of shares within six months from the date of their purchase are
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gains with respect to such shares.
Any loss realized upon the redemption of shares within six months from
the date of their purchase are disallowed to the extent of any tax-exempt
dividends received with respect to such shares, although the period may be
reduced under Treasury regulations to be prescribed. Any loss realized on the
redemption of shares of Scudder California Tax Free Fund may be disallowed if
shares of such Fund are purchased within 30 days before or after such
redemption.
Distributions derived from interest exempt from regular federal income
tax may subject corporate shareholders to, or increase their liability under,
the 20% corporate alternative minimum tax. A portion of such distributions may
constitute a tax preference item for shareholders and may subject them to, or
increase their liability under, the two-tiered 26%/28% individual alternative
minimum tax, but normally no more than 20% of a Fund's net assets are invested
in securities the interest on which is such a tax preference item for
individuals.
Distributions of taxable net investment income and net realized capital
gains are taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
57
<PAGE>
have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of taxable net investment income and net realized
capital gains, whether received in shares or in cash, must be reported by each
shareholder on a federal income tax return. Dividends and capital gains
distributions declared and payable to shareholders of record as of a specified
date in October, November or December are deemed to have been received by
shareholders in December if paid during January of the following year.
Shareholders are also required to report tax-exempt interest. Redemptions of
shares of Scudder California Tax Free Fund, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
Interest which is tax-exempt for federal income tax purposes is
included as income for purposes of determining the amount of social security or
railroad retirement benefits subject to tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund is not deductible for federal income tax purposes. Under rules
used by the IRS to determine when borrowed funds are used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain Governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
The Trust has not undertaken any investigation as to the users of the facilities
financed by bonds in a Fund's portfolio.
Distributions by Scudder California Tax Free Fund result in a reduction
in the net asset value of the Fund's shares. Should a distribution reduce the
net asset value below a shareholder's cost basis, such distribution would
nevertheless be taxable to the shareholder, to the extent it is derived from
other than tax-exempt interest, as ordinary income or capital gains as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, is nevertheless taxable to them.
All futures contracts entered into by Scudder California Tax Free Fund
and all listed nonequity options written or purchased by that Fund (including
options on futures contracts and options on securities indices) are governed by
Section 1256 of the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such position are
treated as 60% long-term and 40% short-term capital gain or loss, and on the
last trading day of the Fund's fiscal year, all outstanding Section 1256
positions are marked to market (i.e. treated as if such positions were closed
out at their closing price on such day), with any resulting gain or loss
recognized as 60% long-term and 40% short-term capital gain or loss. Under
certain circumstances, entry into a futures contract to sell a security may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of the underlying security or a substantially identical
security in the Fund's portfolio.
Positions of Scudder California Tax Free Fund which consist of at least
one debt security not governed by Section 1256 and at least one futures contract
or nonequity option governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such debt security will be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses. Certain tax elections, however,
exist for them which reduce or eliminate the operation of these rules. The Trust
monitors the Fund's transactions in options and futures and may make certain tax
elections in order to mitigate the operation of these rules and prevent
disqualification of the Fund as a regulated investment company for federal
income tax purposes.
Under the federal income tax law, each Fund is required to report to
the IRS all distributions of taxable income and capital gains as well, as in the
case of Scudder California Tax Free Fund, gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
58
<PAGE>
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company are
generally subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt shareholders who fail to furnish the investment company with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. Under a special exception,
distributions of taxable income and capital gains of a Fund are not subject to
backup withholding if the Fund reasonably estimates that at least 95% of all of
its distributions consist of tax-exempt interest. However, in this case, the
proceeds from the redemption or exchange of shares may be subject to backup
withholding. Under another special exception, proceeds from the redemption or
exchange of Fund shares are exempt from withholding if the Fund maintains a
constant net asset value per share. Withholding may also be required if a Fund
is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, are reduced by the amounts required to be
withheld.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her.
State Taxation
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor the Funds are liable for any income or franchise tax in the
Commonwealth of Massachusetts provided that each Fund qualifies as a regulated
investment company.
In any year in which the Funds qualify as regulated investment
companies under Subchapter M of the Code and are exempt from federal income tax,
the Funds will also be relieved of liability for California state franchise and
corporate income tax to the extent their earnings are distributed to their
shareholders. Each Fund may be taxed on its undistributed taxable income. If for
any year either of the Funds does not qualify for the special tax treatment
afforded regulated investment companies, then all of such Fund's taxable income
(including interest income on California municipal securities for franchise tax
purposes only) may be subject to California state franchise or income tax at
regular corporate rates.
If at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company (or series
thereof) consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California, then the regulated investment
company (or series thereof) will be qualified to pay dividends exempt from
California personal income tax (hereinafter referred to as "California
exempt-interest dividends"). Each of the Funds intends to qualify under the
above requirements so it can pay California exempt-interest dividends. However,
if a Fund fails to so qualify, then no part of its dividends to shareholders
will be exempt from California personal income tax.
Within 60 days after the close of its taxable year, each Fund will
notify each shareholder of the portion of the dividends paid by the Fund with
respect to such taxable year which is exempt from California state personal
income tax. Interest on obligations of Puerto Rico and other U.S. Possessions,
as well as interest on obligations of the State of California or its political
subdivisions, may be distributed as California tax-exempt interest dividends.
Distributions from the Funds which are attributable to sources other than those
described in the preceding sentence generally are taxable to such shareholders
as ordinary income. However, distributions derived from interest on U.S.
Government obligations, if any, may also be designated by a Fund and treated by
shareholders as exempt under the California personal income tax provided the 50%
requirement of the preceding paragraph is satisfied.
In cases where shareholders of a Fund are "substantial users" or
"related persons" with respect to California municipal securities held by the
Fund, such shareholders should consult their own tax advisers to determine
whether California exempt-interest dividends paid by the Fund with respect to
such securities retain California state personal income tax exclusion for such
shareholders. In this connection, rules similar to those regarding the possible
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unavailability of exempt interest treatment of Fund dividends to "substantial
users" (or persons related thereto) for federal income tax purposes are
applicable for California state tax purposes. See "Federal Taxation" above.
To the extent, if any, dividends paid to shareholders of a Fund are
derived from the excess of net long-term capital gains over net short-term
capital losses, such dividends will not constitute California exempt-interest
dividends. Such dividends will generally be taxed as long-term capital gains
under rules similar to those regarding the treatment of capital gain dividends
for federal income tax purposes; provided that California has not adopted the
federal rule that allows a regulated investment company to elect to treat such
capital gains as having been distributed even though no capital gain dividend
has actually been paid. See "Federal Taxation" above. In the case where the
Funds make this election for federal income tax purposes, any such capital gains
may be subject to tax at the Fund level for California franchise or corporate
income tax purposes.
Shares of the Funds are not subject to the California property tax.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Fund are not deductible for California personal
income tax purposes. In addition, any loss realized by a shareholder of a Fund
upon the sale of shares held for six months or less may be disallowed to the
extent of any exempt-interest dividends received with respect to such shares.
Moreover, any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution on such shares is treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the redemption shares within 30 days before or after the acquisition of
other shares of the same Fund may be disallowed under the "wash sale" rules.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Funds and their
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of any Fund dividends
constituting California exempt-interest dividends is excludable for California
state personal income tax only. Any dividends paid to shareholders subject to
California state franchise or California state corporate income tax may
therefore be taxed as ordinary dividends to such shareholders notwithstanding
that all or a portion of dividends is exempt from California state personal
income tax. Accordingly, potential investors in a Fund, excluding, in
particular, corporate investors which may be subject to either California
franchise tax or California corporate income tax, should consult their tax
advisers with respect to the application of such taxes to the receipt of Fund
dividends and as to their own California state tax situation, in general.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
To the maximum extent feasible, the Adviser places orders for portfolio
transactions for each Fund through the Distributor which in turn places orders
on behalf of a Fund with issuers, underwriters or other broker/dealers. The
Distributor receives no commissions, fees or other remuneration from the Funds
for this service. Allocation of brokerage is supervised by the Adviser.
Each Fund's purchases and sales of portfolio securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the 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 involve an underwriting fee paid to
the underwriter.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission, where
applicable (negotiable in the case of U.S. national securities exchange
transactions), size of order, difficulty of execution and skill required of the
executing broker/dealer. The Adviser seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor with commissions charged on comparable
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<PAGE>
transactions, as well as by comparing commissions paid by a Fund to reported
commissions paid by others. The Adviser reviews on a routine basis commission
rates, execution and settlement services performed, making internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply market quotations to the custodian of a Fund for
appraisal purposes or who supply research, market and statistical information to
the Trust or the Adviser. The term "research, market and statistical
information" includes advice as to the value of securities; the advisability of
investing in, purchasing or selling securities; the availability of securities
or purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is not authorized, when placing
portfolio transactions for a Fund, to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might charge for executing
the same transaction, solely on account of the receipt of research, market or
statistical information. The Adviser does not place orders with broker/dealers
on the basis that a 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.
The Adviser may place brokerage transactions through the Custodian and
a credit against the custodian fee due to State Street Bank and Trust Company
equal to one-half of the commission on any transaction will be given. Except for
implementing the policy stated above, there is no intention to place portfolio
transactions with particular broker/dealers or groups thereof.
Although certain research, market and statistical information from
broker/dealers may be useful to the Trust and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Trust and not all such information is used by
the Adviser in connection with the Funds. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Trust.
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 the Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
Each Fund's portfolio experiences turnover. The portfolio turnover
rates of Scudder California Tax Free Fund (defined by the SEC as the ratio of
the lesser of sales or purchases of securities to the monthly average value of
the portfolio, excluding all securities with remaining maturities at the time of
acquisition of one year or less) for the fiscal years ended March 31, 1995 and
1994, were 87.3% and 126.5%, respectively.
NET ASSET VALUE
Scudder California Tax Free Fund. The net asset value of shares of the Fund is
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading (the "Value Time"). The Exchange is scheduled to be
closed on the following holidays: New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset
value per share is determined by dividing the value of the total assets of a
Fund, less all liabilities, by the total number of shares outstanding.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
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<PAGE>
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
Scudder California Tax Free Money Fund. The net asset value per share of Scudder
California Tax Free Money Fund is determined (twice daily as of twelve o'clock
noon and the close of trading on the Exchange) on each day when the Exchange is
open for trading (as noted above). Net asset value per share is determined by
dividing the total assets of the Fund, less all of its liabilities, by the total
number of shares of the Fund outstanding. The valuation of the Fund's portfolio
securities is based upon their amortized cost which does not take into account
unrealized securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During periods of declining interest rates, the quoted yield on shares of the
Fund may tend to be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio instruments. Thus, if the
use of amortized cost by the Fund resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in the Fund would be able to obtain
a somewhat higher yield if he purchased shares of the Fund on that day, than
would result from investment in a fund utilizing solely market values, and
existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates. Other assets for
which market quotations are not readily available are valued in good faith at
fair value using methods determined by the Trustees and applied on a consistent
basis. For example, securities with remaining maturities of more than 60 days
for which market quotations are not readily available are valued on the basis of
market quotations for securities of comparable maturity, quality and type. The
Trustees review the valuation of the Fund's securities through receipt of
regular reports from the Adviser at each regular Trustees' meeting.
Determinations of net asset value made other than as of the close of the
Exchange may employ adjustments for changes in interest rates and other market
factors.
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ADDITIONAL INFORMATION
Experts
The Financial highlights of each Fund included in the prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of Coopers & Lybrand L.L.P. , One Post Office Square,
Boston, MA 02109, independent accountants, and given on the authority of that
firm as experts in accounting and auditing.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with each Fund's property or
the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the respective Fund's property of any
shareholder held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations.
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-quality bonds.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have speculative elements as well as investment-grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade,
with factors giving security to principal and interest inadequate and
potentially unreliable over any period of time. Such securities are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High-grade), A (Good-grade), BBB (Investment-grade) and BB and B (Below
investment-grade). Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions. Bonds rated BBB have an adequate capacity to pay principal
and interest. Adverse economic conditions or changing circumstances are likely
to lead to a weakened capacity to pay interest and repay principal for bonds of
this category than for bonds of higher rated categories. Securities rated BB or
below by S&P are considered below investment grade, with factors giving security
to principal and interest inadequate and potentially unreliable over any period
of time. Such securities are commonly referred to as "junk" bonds and as such
they carry a high margin of risk.
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S&P's top ratings for municipal notes issued after July 29, 1984 are
SP-1 and SP-2. The designation SP-1 indicates a very strong capacity to pay
principal and interest. A "+" is added for those issues determined to possess
overwhelming safety characteristics. An "SP-2" designation indicates a
satisfactory capacity to pay principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A,
BBB, BB and B. Bonds rated AAA are considered to be investment-grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated 'AAA.'
Because bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated '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 rates.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with greater ratings. Securities
rated BB or below by Fitch are considered below investment grade, with factors
giving security to principal and interest inadequate and potentially unreliable
over any period of time. Such securities are commonly referred to as "junk"
bonds and as such they carry a high margin of risk.
Commercial Paper Ratings
Commercial paper rated A-1 or better by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationship which exists with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F-1+ is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
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Glossary
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semi-annually in amounts equal to one half the annual
interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market discount
(premium) is the difference between market price and face value.
4. Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
5. Municipal Obligation
Obligations issued by or on behalf of states, territories and
possessions of the U.S., their political subdivisions, agencies and
instrumentalities, the District of Columbia and other issuers, the
interest from which is, at the time of issuance in the opinion of bond
counsel for the issuers, exempt from regular federal income tax.
6. Net Asset Value Per Share
The value of each share of a Fund for purposes of sales and
redemptions.
7. Net Investment Income
The net investment income of each Fund is comprised of its interest
income, including amortizations of original issue discounts, less
amortizations of premiums and expenses paid or accrued.
8. Unit Investment Trust
An investment company organized under a trust or similar agreement
which does not have a board of trustees and which issues only
redeemable securities each of which represents an undivided interest in
a portfolio of specified securities.
Other Information
The CUSIP number of Scudder California Tax Free Money Fund is
811115-20-3. The CUSIP number of Scudder California Tax Free Fund is
811115-10-4.
Each Fund has a fiscal year ending on March 31.
Portfolio securities of each Fund are held separately, pursuant to a
custodian agreement, by the Funds' custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The law firm of Willkie Farr & Gallagher is counsel for the Trust.
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The name "Scudder California Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987, as amended from time to time, and all persons dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any claims against a Fund as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of a Fund. No series of the Trust is liable for the obligations of any
other series of the Trust. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Fund's Declaration of Trust, as amended from time to
time. The Declaration of Trust of the Trust is on file at the Massachusetts
Secretary of State's Office in Boston, Massachusetts. All persons dealing with a
Fund must look only to the assets of that Fund for the enforcement of any claims
against such Fund as no other series of the Trust assumes any liabilities for
obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a wholly-owned subsidiary of the Adviser, computes net
asset value for the Funds. Scudder California Tax Free Money Fund pays Scudder
Fund Accounting Corporation an annual fee equal to 0.0200% of the first $150
million of the average daily net assets, 0.0060% of such assets in excess of
$150 million and 0.0035% of such assets in excess of $1 billion, plus holding
and transaction charges. Scudder California Tax Free Fund pays Scudder Fund
Accounting Corporation an annual fee equal to 0.024% of the first $150 million
of the average daily net assets, 0.007% of such assets in excess of $150 million
and 0.004% of such assets in excess of $1 billion, plus holding and transaction
charges for this service.
Scudder Service Corporation (the "Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a wholly-owned subsidiary of the Adviser, is
the transfer and dividend-paying agent for the Funds and provides subaccounting
and recordkeeping services for shareholder accounts in certain retirement and
employee benefit plans. Service Corporation also serves as shareholding service
agent. Scudder California Tax Free Fund pays Service Corporation an annual fee
of $25.00 for each account maintained for a shareholder. Of this total, $13.25
is for its services as transfer and dividend-paying agent and $11.75 is for its
services as shareholder service agent. Scudder California Tax Free Money Fund
pays Service Corporation an annual fee of $28.90. The Service Corporation fee
incurred by Scudder California Tax Free Fund and Scudder California Tax Free
Money Fund for the years ended March 31, 1995 and 1994, amounted to $188,774 and
$203,558 and $84,167 and $79,902, respectively.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Trust has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement for further information with respect to the Funds
and the securities offered hereby. This Registration Statement is available for
inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder California Tax Free Money Fund
The financial statements, including the investment portfolio, of
Scudder California Tax Free Money Fund, together with the Report of Independent
Accountants, Financial Highlights and the Notes to Financial Statements, are
incorporated by reference and attached hereto in the Annual Report to the
Shareholders of the Fund dated March 31, 1995, and are hereby deemed to be a
part of this Statement of Additional Information.
Scudder California Tax Free Fund
The financial statements, including the investment portfolio, of
Scudder California Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and the Notes to Financial Statements, are
incorporated by reference and attached hereto in the Annual Report to the
Shareholders of the Fund dated March 31, 1995, and are hereby deemed to be a
part of this Statement of Additional Information.
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Shares of Scudder California Tax Free Money Fund are not insured or guaranteed
by the U.S. government. Scudder California Tax Free Money Fund seeks to maintain
a constant net asset value of $1.00 per share, but there can be no assurance
that the stable net asset value will be maintained.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder California
Tax Free Money Fund
- -------------------------------------
Scudder California
Tax Free Fund
Annual Report
March 31, 1995
* For investors seeking double tax-free income exempt from both California
and regular federal income taxes.
* Pure no-load(TM) funds with no commissions to buy, sell, or exchange
shares.
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
SCUDDER CALIFORNIA TAX FREE MONEY FUND
CONTENTS
2 Highlights
3 Letter from the Funds' President
4 Scudder California Tax Free Fund Performance Update
5 Scudder California Tax Free Fund Portfolio Summary
6 Scudder California Tax Free Money Fund Portfolio Management Discussion
7 Scudder California Tax Free Fund Portfolio Management Discussion
11 Scudder California Tax Free Money Fund Investment Portfolio
15 Scudder California Tax Free Money Fund Financial Statements
18 Scudder California Tax Free Money Fund Financial Highlights
19 Scudder California Tax Free Fund Investment Portfolio
25 Scudder California Tax Free Fund Financial Statements
28 Scudder California Tax Free Fund Financial Highlights
29 Notes to Financial Statements
34 Report of Independent Accountants
35 Tax Information
37 Officers and Trustees
38 Investment Products and Services
39 How to Contact Scudder
HIGHLIGHTS
Scudder California Tax Free Money Fund
* Scudder California Tax Free Money Fund offered a 7-day effective yield of
3.58% on March 31, 1995, equivalent to a 6.66% taxable yield for investors
in the top federal and state income tax brackets.
(bar chart title)
7-Day Effective Yields on March 31, 1995
(bar chart data)
Scudder
California Tax Taxable
Free Money Fund Equivalent Yield
--------------- ----------------
3.58% 6.66%
Scudder California Tax Free Fund
* Scudder California Tax Free Fund provided a 5.04% 30-day net annualized SEC
yield on March 31, 1995.
* For shareholders subject to the 46.24% maximum combined federal and state
income tax rate, the Fund's yield was equal to a 9.38% taxable yield.
(bar chart title)
30-Day Yield on March 31, 1995
(bar chart data)
Scudder
California Tax Taxable
Free Fund Equivalent Yield
-------------- ----------------
5.04% 9.38%
* Scudder California Tax Free Fund earned the number-one ranking from Lipper
among California tax-free funds for the five-year period ended March 31, 1995.
Page 7 contains additional information about the Fund's ranking.
2
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LETTER FROM THE FUNDS' PRESIDENT
Dear Shareholders,
Investors' concerns about inflationary economic growth have abated in
recent months, after creating much turmoil for the world's investment markets in
1994. Indications of continued low inflation and weakness in certain segments of
the economy, combined with the Federal Reserve's most recent interest-rate
increases in November and February, have reassured many investors. Yields have
declined from their November highs, and municipal bond prices have made a
substantial recovery. Year-to-date through March 31, long-term municipal bonds,
as measured by the unmanaged Lehman Brothers Municipal Bond Index, returned
7.07% on average, more than making up for the -5.17% return reported for all of
1994.
Given the swings in interest rates over the past year and a half, the
question for municipal bond investors is, can the recent positive shift in
interest rates be sustained? We believe rates will remain relatively stable if
economic growth continues to slacken in the United States. Nevertheless,
additional interest-rate increases are not out of the question given some
lingering inflationary concerns: Commodity prices continue to rise, factory
production is pushing the limits of capacity, and the dollar has fallen to
record lows against the Japanese yen and German mark.
Your portfolio managers will continue to concentrate their efforts on
fundamental investment research and security selection as a means to generate
high current double tax-free income and attractive total returns for the
California bond portfolio. For the money market portfolio, your Fund managers
will continue to focus on a combination of competitive yields and price
stability. As always, please call a Scudder Investor Relations representative at
1-800-225-2470 if you have questions about your Fund. Page 39 provides more
information on how to contact Scudder. Thank you for choosing Scudder California
Tax Free Funds to help meet your investment needs.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder California Tax Free Fund
Scudder California Tax Free Money Fund
3
<PAGE>
Scudder California Tax Free Fund
Performance Update as of March 31, 1995
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Scudder California Tax Free Fund
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $10,675 6.75% 6.75%
5 Year $14,962 49.62% 8.39%
10 Year $24,225 142.25% 9.25%
Lehman Brothers Municipal Bond Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $10,743 7.43% 7.43%
5 Year $14,859 48.59% 8.24%
10 Year $25,456 154.56% 9.79%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended March 31
Scudder California Tax Free Fund
Year Amount
- ----------------------
85 10000
86 12319
87 13811
88 13576
89 14906
90 16191
91 17572
92 19459
93 22402
94 22692
95 24225
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
85 10000
86 12707
87 14100
88 14455
89 15496
90 17131
91 18712
92 20581
93 23158
94 23695
95 25456
The unmanaged Lehman Brothers Municipal Bond Index is a market
value-weighted measure of municipal bonds issued across the United
States. Index issues have a credit rating of at least Baa and a
maturity of at least two years. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
- -----------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------------------------------------------------------------------------------
Net Asset Value... $10.95 $11.18 $ 9.99 $10.26 $10.29 $10.41 $10.60 $11.05 $10.02 $10.07
Income Dividends.. $ .73 $ .71 $ .69 $ .68 $ .65 $ .63 $ .61 $ .59 $ .53 $ .51
Capital Gains and
Other Distributions $ -- $ .30 $ .26 $ -- $ .19 $ .09 $ .28 $ .49 $ .68 $ .09
Fund Total
Return (%)........ 23.19 12.11 -1.70 9.80 8.62 8.53 10.74 15.13 1.30 6.75
Index Total
Return (%)........ 27.07 10.97 2.52 7.21 10.56 9.22 10.02 12.52 2.32 7.43
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
4
<PAGE>
Portfolio Summary as of March 31, 1995
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Lease Rentals 37%
Hospital/Health 14%
General Obligation 12% We continue to emphasize broad
Sales & Special Tax 11% portfolio diversification, although
Housing Finance Authority 11% we have reduced our exposure to Los
Water/Sewer Revenue 5% Angeles County bonds.
Electric Utility Revenue 4%
Escrow & Collateral 1%
Miscellaneous Municipal 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Quality
- --------------------------------------------------------------------------
AAA 61%
AA 5% Portfolio quality remains high --
A 26% over the 12-month period AAA-rated
BBB 6% bonds increased to 61% of the Fund's
Not Rated 2% portfolio from 39%.
----
100%
====
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Effective Maturity
- --------------------------------------------------------------------------
Less than 1 year 4%
1 < 5 years 20% Bonds with effective maturities
5 < 10 years 15% of five to less than 20 years --
10 < 20 years 33% 48% of the portfolio -- currently
Greater than 20 years 28% offer good value and attractive
---- yields.
100%
====
Weighted average effective maturity: 14 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's Investment Portfolio,
see page 19.
5
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The effects of the Federal Reserve's 1994-95 monetary policy have been
felt everywhere, including the tax-exempt money markets. Interest rates of
tax-exempt money market instruments have risen substantially over the past 12
months. Scudder California Tax Free Money Fund's 7-day effective yield rose to
3.58% on March 31, 1995, from 1.78% a year earlier. For investors in the highest
combined state and federal income tax bracket, this yield equaled a 6.66%
compounded taxable yield, well above the 5.53% average for taxable money funds,
according to IBC/Donoghue, Inc., an independent firm that tracks money fund
performance.
Scudder California Tax Free Money Fund seeks to maximize tax-free
income while preserving high portfolio quality and a stable $1.00 share price.
During the first half of the Fund's fiscal year, we took advantage of the
increase in short-term interest rates by keeping the Fund's average maturity
longer than its money fund peers. When the news of Orange County's bankruptcy
shook the market, we became more defensive and shortened the Fund's average
maturity substantially. During this period of heightened market volatility, our
principal focus was price stability. This cautious approach helped the Fund
through a difficult period for California tax-exempt securities, and provides us
with a degree of flexibility. Since then, we have staggered the maturities in
the portfolio to provide us with regular opportunities to extend the average
maturity in an uncertain interest-rate environment. As of March 31, 1995, the
Fund's average maturity was 39 days, compared with 65 days six months before.
For the 12 months ended March 31, 1995, the Fund provided a total return of
2.72%, assuming reinvestment of all income distributions, which totaled $0.027
during the period.
As always, we will continue to search for high-quality, short-term
municipal securities for Scudder California Tax Free Money Fund while actively
managing the Fund's average maturity to provide a competitive double tax-free
yield.
Sincerely,
Your Portfolio Management Team
/s/Rebecca Wilson /s/K. Sue Cote
Rebecca Wilson K. Sue Cote
Scudder California Tax Free Money Fund:
A Team Approach to Investing
Rebecca L. Wilson is Lead Portfolio Manager for California Tax Free Money
Fund and contributes nine years of experience in municipal investing and
research. Rebecca assumed responsibility for the Fund in 1987 after joining
Scudder in 1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987
and has spent 11 years working with short-term fixed-income investments.
6
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
On March 31, 1995, Scudder California Tax Free Fund provided a 30-day
net annualized SEC yield of 5.04%. For shareholders subject to the 39.6% maximum
federal income tax rate and the 11.00% maximum California state income tax rate,
the Fund's yield is equivalent to a 9.38% taxable yield, higher than yields
provided by taxable investments of comparable credit quality. During the
12-month period ended March 31, 1995, shareholders received $0.51 per share of
income exempt from both federal and California state income taxes, and capital
gains of $0.09 per share.
Despite wide fluctuations in California's municipal bond prices, the
Fund's share price increased $0.05 to $10.07 per share over the 12-month period.
The Fund posted a positive total return of 6.75% for the year through a
combination of interest income, capital gain distributions, and share price
appreciation. This return compares favorably with the 5.94% average total return
of the 83 California municipal bond funds tracked by Lipper Analytical Services
for the same period.
Scudder California Tax Free Fund has consistently exceeded the average
performance of California tax-exempt funds for longer time periods as well. In
fact, the Fund earned the number-one ranking for total return among California
tax-free funds for the five years ended March 31, 1995. The Fund's rankings for
the one- and 10-year periods were 20th and 6th, respectively. The chart below
illustrates how the Fund ranked for various periods.
Scudder California Tax Free Fund's Average Annual Return
Versus the Lipper Average of all California Tax-Free Funds*
(Returns for periods ended March 31, 1995)
<TABLE>
<CAPTION>
Period Scudder California Lipper average Number of
Tax Free Fund return annual return Funds tracked
<S> <C> <C> <C>
1 year 6.75% 5.94% 83
2 years 3.99 3.92 65
3 years 7.58 6.77 55
4 years 8.36 7.50 49
5 years 8.39 7.57 44
10 years 9.25 8.83 16
<FN>
* Past performance is no guarantee of future results.
</FN>
</TABLE>
California's Economy
After a protracted recession, California's economic recovery is well
underway, although considerably more moderate than those of recent decades.
7
<PAGE>
California's unemployment rate fell to a four-year low of 7.3% in February,
compared with 5.4% for the nation. Defense-related jobs continue to contract,
but most other segments of the economy are showing signs of job growth. The
impact of the floods in March 1995, military base closures, and a likely
decrease in trade with Mexico due to the devaluation of the peso are expected to
be manageable for the state, but these events will affect certain local
economies for some time.
California's finances continue to improve. After running budget
deficits from fiscal year 1990 through 1993, the state was left with a $2.8
billion debt. California began balancing its budget in fiscal year 1994 mainly
by controlling expenditures. The state expects to end fiscal years 1995 and 1996
with surpluses and eliminate its accumulated deficit by April 1996. Governor
Wilson's budget for fiscal year 1996 is extremely conservative, with general
fund revenues growing less than 1%.
Municipal Bonds Rally
Most of 1994 stood in marked contrast to performance in the last five
months of the Fund's fiscal year. The Federal Reserve repeatedly raised
short-term interest rates to try to slow the pace of economic growth, which led
to falling bond prices and rising yields across the maturity spectrum. All told,
yields of Treasury bonds rose almost 2 1/2 percentage points during the 12
months ended November 1994. Bond prices dropped 20% during the same time period,
amounting to their worst 12-month total return in history. Yields on long-term
municipal bonds rose almost as much as Treasury yields during the period. As the
environment for bond investments grew more challenging, we took a defensive
stance to help reduce price erosion, maintaining a shorter average effective
maturity and higher cash position than we had during the preceding three years.
In recent months, the municipal bond market has enjoyed a significant
rally. Concerns over the possible overheating of the U.S. economy eased
considerably in late 1994 as economic statistics pointed to weakness in several
sectors. Retail sales and job growth plateaued, while demand for housing and new
cars slackened. The steady decline in the supply of tax-free bonds also helped
municipal bond prices. During this period, we increased the Fund's average
effective maturity and reduced our cash position to help the Fund regain ground
lost during 1994.
8
<PAGE>
Orange County Update
On December 6, Orange County, California, declared bankruptcy -- the
largest municipal bankruptcy in U.S. history. The county's fiscal crisis was
sparked by steep losses in its investment fund, which had repeatedly borrowed
large amounts of money in the short-term market and invested the proceeds in
longer-maturity bonds. As the Federal Reserve initiated its string of short-term
interest-rate increases in February 1994, the borrowing costs of the Orange
County fund began to mount, while the market value of the securities purchased
with the borrowed funds fell. Finally, in early December, the county
acknowledged that the losses in its investment pool had become so large as to
make the county insolvent. At the time of the bankruptcy, Scudder California Tax
Free Fund held no direct investments in Orange County bonds. In fact, no Fund
holding was downgraded or otherwise materially affected by the county's
problems. Our strong emphasis on credit selection and quality investments helped
the Fund during this difficult period.
We expect that Orange County will take the necessary steps over the
next year to emerge from bankruptcy and re-enter the capital markets as a
borrower for traditional municipal needs. As of March 31, 1995, the county had
reached agreements with the more than 180 municipalities invested in its pool
that it would repay 80% to 90% of the monies originally invested. The county has
proposed an increase in its sales tax along with various other measures to raise
revenues. In the coming months, if market conditions warrant, we intend to
survey various opportunities in Orange County municipal bonds for possible
investment.
The Fund's Four-Point Strategy
The Fund's investment strategy continues to focus on four basic
elements: (1) purchasing bonds with effective maturities of less than 20 years;
(2) purchasing noncallable bonds at yields close to those of callable bonds with
comparable maturities; (3) purchasing high-yielding callable bonds, and (4)
diversifying investments based on careful credit selection.
Bonds with effective maturities of at least five but less than 20 years
represented almost 48% of the portfolio on March 31, 1995, compared with
approximately 50% on March 31, 1994. Bonds in this maturity range generally
offer good value and provide attractive yields with less price volatility than
longer-term bonds.
9
<PAGE>
While shorter-maturity bonds and noncallable bonds offer a relative
degree of price stability, they also typically yield less than longer-maturity,
callable debt instruments. In order to enhance the portfolio's overall yield, we
selectively purchased higher-coupon bonds that can be called by their issuers in
a relatively short time. Typically, these bonds provide yields three quarters to
one percentage point higher than bonds maturing on similar call dates.
Scudder California Tax Free Fund continues to emphasize careful credit
selection and portfolio diversification, investing in a variety of issues,
including general obligation, revenue, water district, hospital, single family
housing, multi-family housing, school district, lease, and tax allocation bonds
as of March 31, 1995. However, we have reduced our exposure to Los Angeles
County bonds because of the series of natural and man-made disasters that have
occurred there in recent years -- since 1992 the County has been declared a
disaster area six times. The average weighted credit quality of the Fund's
portfolio at the end of March was AA.
Our Near-Term Outlook
Recent signs point to a slowing growth rate for the U.S. economy. Even
export sales are moderating, partly due to the economic problems in Mexico, our
largest trading partner. Still, we cannot rule out additional rate hikes. It is
unclear, for example, whether consumer spending will remain restrained or
increase and add to inflationary pressures. Despite economic uncertainties, we
expect a calmer municipal marketplace for the near term relative to last year,
with firm prices due to the limited supply of tax-free bonds. Another potential
concern is recent congressional discussions regarding possible alterations of
U.S. tax law. We believe that when all is said and done, municipal bonds will
remain attractive investments for investors who need tax-free income.
As we pursue Scudder California Tax Free Fund's objectives, we intend
to continue to emphasize noncallable bonds with effective maturities between
five and 15 years. As always, we will pay close attention to credit quality as
we position the Fund to seek high double tax-free income and a competitive total
return.
Sincerely,
Your Portfolio Management Team
/s/Jeremy L. Ragus /s/Donald C. Carleton
Jeremy L. Ragus Donald C. Carleton
Scudder California
Tax Free Fund:
A Team Approach to Investing
Scudder California Tax Free Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Scudder California Tax Free Fund's Lead Portfolio Manager Jeremy L. Ragus has
had responsibility for the Fund's day-to-day operations since he joined Scudder
in 1990. Jeremy has 14 years of experience in municipal investing. Donald C.
Carleton, Portfolio Manager, has over 25 years of investment management
experience and has worked on the Fund since he arrived at Scudder in 1983.
10
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
INVESTMENT PORTFOLIO as of March 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
100.0% MUNICIPAL INVESTMENTS
-------------------------------------------------------------------------------------------------------
CALIFORNIA Anaheim, CA, Electric Utility District,
Tax Exempt Commercial Paper:
4.3%, 5/22/95 .......................................... 1,000,000 A1+ 1,000,000
4.6%, 5/16/95 .......................................... 1,000,000 A1+ 1,000,000
Butte Office of Education, CA, Tax and Revenue
Anticipation Notes, 5%, 10/27/95 ........................ 1,000,000 SP1+ 1,004,392
California Health Facilities Authority,
Pooled Loan Program:
Series 1985 A, Weekly Demand Note,
4.15%, 5/1/95 (c)* .................................... 200,000 MIG1 200,000
Series 1985 B, Weekly Demand Note, 4.15%,
10/1/10 (c)* .......................................... 100,000 MIG1 100,000
California Health Facilities Finance Authority,
Catholic Healthcare West, Series C, Variable Rate
Demand Note, 3.95%, 7/1/20 (c)* ......................... 1,000,000 A1+ 1,000,000
California Pollution Control Revenue, Minnesota,
Mining & Manufacturing, Weekly Demand Bond,
3.85%, 11/1/96* ....................................... 400,000 MIG1 400,000
California Pollution Control Revenue, Pacific Gas
& Electric Company, Series C, Tax Exempt
Commercial Paper:
3.95%, 4/3/95 ......................................... 1,000,000 A1+ 1,000,000
4.05%, 5/12/95 ........................................ 500,000 A1+ 500,000
California Revenue Anticipation Warrant,
5.75%, 4/25/96 ........................................ 1,000,000 SP-1 1,010,436
Chino, CA, Unified School District, Certificate of
Participation, Refunding Capital Construction
Project, Variable Rate Demand Bond, 4%, 9/1/00* ......... 2,600,000 MIG1 2,600,000
City of Industry, Los Angeles County, CA, Industrial
Development Revenue, Helene Curtis, Inc.,
Weekly Demand Bond, 4%, 10/1/06* ........................ 1,900,000 A1+ 1,900,000
Delmar Racetrack Authority, CA, Tax Exempt
Commercial Paper:
4%, 5/11/95 ............................................ 1,000,000 A1+ 1,000,000
4.25%, 5/15/95 ......................................... 500,000 A1+ 500,000
East Bay, CA, Municipal Utility District, Tax Exempt
Commercial Paper:
3.9%, 4/11/95 .......................................... 900,000 A1+ 900,000
4.25%, 5/15/95 ......................................... 1,500,000 A1+ 1,500,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Escondido, CA, Multi-Family Housing Revenue,
Series 1985 A, Morning View Terrace Project,
Variable Rate Demand Note, 4.0%, 2/15/07* .............. 700,000 MIG1 700,000
Fresno, CA, Unified School District, Tax and
Revenue Anticipation Note, 4.75%, 7/19/95 .............. 1,000,000 MIG1 1,001,746
Glendale, CA, Reliance Development Co. Inc.,
Public Parking Project, Series 1984 A, Variable Rate
Demand Bond, 3.6%, 12/1/14* ............................ 700,000 A1+ 700,000
Golden Empire Schools Financing Authority, CA,
Kern High School District, Project B, Variable Rate
Demand Note, 4.2%, 12/1/22* ............................ 1,000,000 A1+ 1,000,000
Huntington Beach, CA, River Meadows Apartments,
Variable Rate Demand Bond, 4.625%, 10/1/05* ............ 1,500,000 A1 1,500,000
Irvine, CA, Improvement Bond, Assessment District
89-10, Daily Demand Bond, 4.8%, 9/2/15* ................ 1,200,000 MIG1 1,200,000
Kern County, CA, Certificate of Participation,
Public Facilities Project, Variable Rate Demand Bond:
Series A, 3.95%, 8/1/06* .............................. 1,400,000 MIG1 1,400,000
Series D, 3.95%, 8/1/06* .............................. 1,800,000 MIG1 1,800,000
Lancaster, CA, Redevelopment Agency, Multi-Family
Housing Revenue, Westwood Park Apartments,
Variable Rate Demand Notes, 4%, 12/1/07* ............... 600,000 MIG1 600,000
Long Beach, CA, Tax & Revenue Anticipation Note,
4.75%, 9/20/95 ......................................... 1,000,000 MIG1 1,002,939
Los Angeles, CA, Metropolitan Transportation Authority,
Sales Tax Revenue, Tax Exempt Commercial Paper:
3.8%, 4/10/95 ......................................... 1,000,000 P1 1,000,000
4.05%, 4/13/95 ........................................ 1,771,000 P1 1,771,000
Los Angeles, CA, Multi-Family Housing Revenue,
Series K, Variable Rate Demand Bond,
4.0%, 7/1/10* .......................................... 3,300,000 A1+ 3,300,000
Ontario, CA, Multi-Family Residential Mortgage
Revenue, Park Centre Partners, Variable Rate
Demand Bond, 4.1%, 8/1/07* ............................. 2,000,000 MIG1 2,000,000
Ontario, CA, Redevelopment Agency, Multi-Family
Housing Revenue:
Daisy XX Associates, Ltd. Project, Variable Rate
Demand Note, 4%, 11/1/04* .............................. 100,000 MIG1 100,000
Weekly Demand Bond, 4.1%, 4/1/98* ...................... 1,082,000 A1+ 1,082,000
Orange County, CA, Water District, Tax Exempt
Commercial Paper:
4.85%, 5/18/95 ........................................ 1,000,000 A1+ 1,000,000
4.75%, 4/3/95 ......................................... 1,000,000 A1+ 1,000,000
Rincon Del Diablio, CA, Municipal Water District,
Quarterly Optional Tender Bond, 5%, 5/1/95 ............. 2,625,000 MIG1 2,625,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Riverside County, CA, Tax and Revenue
Anticipation Note, 4.25%, 6/30/95 ....................... 1,000,000 SP1+ 1,000,442
Sacramento, CA, Municipal Utility District,
Tax Exempt Commercial Paper:
4.1%, 4/12/95 .......................................... 2,000,000 A1+ 2,000,000
4.2%, 5/16/95 .......................................... 500,000 A1+ 500,000
4%, 7/17/95 ............................................ 1,000,000 A1+ 1,000,000
4.05%, 7/17/95 ......................................... 500,000 A1+ 500,000
Saddleback Valley Central School District, CA,
Tax and Revenue Anticipation Note, 4.5%, 7/28/95 ........ 1,000,000 SP1+ 1,001,378
San Bernardino County, CA, Multi-Family Housing Revenue:
Woodview Apartments Project, Variable Rate
Demand Bond, 4%, 4/1/07* ............................... 1,100,000 MIG1 1,100,000
Western Properties 1, Variable Rate Demand
Bond, 3.9%, 2/1/05* .................................... 1,000,000 MIG1 1,000,000
San Diego, CA, Multi-Family Housing Revenue, Lusk
Mira Mesa Project, Issue E, Variable Rate
Demand Bond, 4%, 4/1/07* ................................ 1,900,000 MIG1 1,900,000
San Jose, CA, Multi-Family Housing Revenue,
Kimberly Woods Project, Variable Rate
Demand Bond, 4%, 11/1/08* ............................... 500,000 MIG1 500,000
San Marcos, CA, Multi-Family Housing Revenue,
Household Bank Project, Series 1985, Weekly
Demand Note, 4.75%, 6/1/05* ............................. 2,700,000 SS&C 2,700,000
Santa Clara, CA, Electric Revenue:
Series B, Junior Lien, Variable Rate Demand
Bonds, 4%, 7/1/10* ...................................... 1,100,000 MIG1 1,100,000
Series C, Junior Lien, Variable Rate Demand
Bond, 4%, 7/1/10* ....................................... 1,300,000 MIG1 1,300,000
Santa Clara County, CA, Housing Authority, Fox
Chase I Project, Weekly Demand Bond, 4%, 11/1/08 (c)* ... 1,000,000 MIG1 1,000,000
Solano County, CA, Tax and Revenue Anticipation
Note, 5%, 11/1/95 ....................................... 1,000,000 SP1+ 1,003,647
South San Francisco, CA, 1991 Water Quality
Control, Variable Rate Demand Bond,
4.05%, 7/1/12* .......................................... 500,000 MIG1 500,000
Southern California Metropolitan Water District,
Tax Exempt Commercial Paper:
3.8%, 4/7/95 ........................................... 700,000 P1 700,000
4%, 5/11/95 ............................................ 1,000,000 A1+ 1,000,000
Southern California Public Power Authority,
Transmission Project, Series 1991, Weekly
Demand Note, 3.85%, 7/1/19 (c)* ......................... 700,000 A1+ 700,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Whittier, CA, Short Term Notes, 4.25%, 6/30/95 ............ 1,000,000 SP1+ 1,000,458
Yucaipa-Calimesa, CA, Joint Unified School District,
Tax and Revenue Anticipation Note, 4.5%, 7/12/95 ........ 1,500,000 MIG1 1,502,417
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $63,405,855) (a) .................................. 63,405,855
==========
<FN>
(a) The cost for the federal income tax purposes was $63,405,855.
(b) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's
investment objectives. Credit ratings shown are assigned by either Standard & Poor's Rating Group, Moody's Investors
Service, Inc. or Fitch Investors Service, Inc. Unrated securities (NR) and securities rated by Scudder (SS&C) have
been determined to be of comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities whose yields vary with a designated market
index or market rate, such as the coupon-equivalent of the Treasury bill rate. Variable rate demand notes are
securities whose yields are periodically reset at levels that are generally comparable to tax-exempt commercial
paper. These securities are payable on demand within seven calendar days and normally incorporate an irrevocable
letter of credit from a major bank. These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate change or to the extent of the demand period.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
MARCH 31, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at value (identified cost $63,405,855)
(Note A) ..................................................... $ 63,405,855
Cash ............................................................. 52,179
Receivables:
Interest ..................................................... 567,363
Fund shares sold ............................................. 448,208
Other assets ..................................................... 647
------------
Total assets ............................................. 64,474,252
LIABILITIES
Payables:
Fund shares redeemed ......................................... $ 163,936
Dividends ................................................... 25,780
Accrued management fee (Note C) .............................. 20,284
Other accrued expenses (Note C) .............................. 37,056
----------
Total liabilities ........................................ 247,056
------------
Net assets, at value ............................................. $ 64,227,196
============
NET ASSETS
Net assets consist of:
Accumulated net realized loss ................................ $ (38,156)
Shares of beneficial interest ................................ 642,358
Additional paid-in capital ................................... 63,622,994
------------
Net assets, at value ............................................. $ 64,227,196
============
NET ASSET VALUE, offering and redemption price per share
($64,227,196 / 64,235,726 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) .................................................. $1.00
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
- --------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED MARCH 31, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................................. $ 2,241,087
Expenses:
Management fee (Note C) .............................................. $ 180,098
Services to shareholders (Note C)..................................... 105,050
Custodian and accounting fees (Note C) ............................... 54,199
Trustees' fees (Note C) .............................................. 14,177
Auditing ............................................................. 24,315
Reports to shareholders .............................................. 12,486
Legal ................................................................ 4,076
Other ................................................................ 15,938 410,339
-----------------------------
Net investment income ................................................ 1,830,748
NET REALIZED LOSS ON INVESTMENTS
Net realized loss from investments ................................... (16,732)
------------
Net increase in net assets resulting from operations ................. $ 1,814,016
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ....................................... $ 1,830,748 $ 1,051,076
Net realized loss from investments .......................... (16,732) (6,414)
------------ ------------
Net increase in net assets resulting from operations ........ 1,814,016 1,044,662
------------ ------------
Distributions to shareholders from net investment
income ($.027 and $.019 per share, respectively) .......... (1,830,748) (1,051,076)
------------ ------------
Fund share transactions at net asset value of
$1.00 per share:
Shares sold ................................................. 88,435,904 90,115,262
Net asset value of shares issued to
shareholders in reinvestment of distributions ............. 1,538,711 848,492
Shares redeemed ............................................. (97,929,860) (74,302,175)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions ................................... (7,955,245) 16,661,579
------------ ------------
INCREASE (DECREASE) IN NET ASSETS ........................... (7,971,977) 16,655,165
Net assets at beginning of period ........................... 72,199,173 55,544,008
------------ ------------
NET ASSETS AT END OF PERIOD ................................. $ 64,227,196 $ 72,199,173
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
----------------------------------------------------------------------- TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------
Net investment income (a) .027 .019 .023 .035 .047 .052 .049 .035
Distributions from net
investment income....... (.027) (.019) (.023) (.035) (.047) (.052) (.049) (.035)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (B)..... 2.72 1.92 2.35 3.54 4.79 5.35 5.04 3.86**
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period
($ millions)............. 64 72 56 58 64 65 64 53
Ratio of operating expenses,
net to average daily
net assets (%) (a)........ .60 .60 .60 .60 .65 .75 .67 .45*
Ratio of net investment
income to average daily
net assets (%)............ 2.68 1.90 2.33 3.50 4.68 5.22 4.98 4.41*
<FN>
(a) Reflects a per share
amount of expenses,
exclusive of
management fees,
reimbursed by the
Adviser of........... $ - $ - $ - $ - $ - $ - $ - $.002
Reflects a per
share amount of
management fee
not imposed by
the Adviser of....... $ .002 $.003 $.003 $.003 $.003 $.001 $.002 $.004
Operating expense
ratio including
expenses reimbursed,
management fee and
other expenses
not imposed (%)...... .84 .90 .86 .88 .92 .90 .84 1.32*
(b) Returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
18
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
4.1% SHORT-TERM MUNICIPAL INVESTMENTS
-------------------------------------------------------------------------------------------------------
California California Pollution Control Finance Authority, Solid
Waste Disposal, Colmac Energy, Weekly Demand
Note, 3.85%, 12/1/15* ......................................... 5,000,000 A1+ 5,000,000
Irvine, CA, Improvement Bond, Assessment
District 89-10, Daily Demand Bond, 4.8%, 9/2/15* ............... 7,200,000 A1+ 7,200,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $12,200,000) ............................................. 12,200,000
----------
-------------------------------------------------------------------------------------------------------
95.9% LONG-TERM MUNICIPAL INVESTMENTS
-------------------------------------------------------------------------------------------------------
CALIFORNIA Anaheim County, CA, Convention Center Financing,
Certificate of Participation, Zero Coupon, 8/1/05 (c) .......... 1,250,000 AAA 695,125
California Health Facilities Finance Authority:
Catholic Healthcare West:
4.75%, 7/1/19 (c) ............................................. 2,635,000 AAA 2,158,671
5%, 7/1/08 (c) ................................................ 5,745,000 AAA 5,353,651
Series A, 5%, 7/1/06 (c) ...................................... 2,000,000 AAA 1,910,280
Series A, 5%, 7/1/21 (c) ...................................... 4,900,000 AAA 4,204,102
Downey Community Hospital, 5.625%, 5/15/08 ..................... 4,000,000 A 3,781,400
Henry Mayo Newhall, Series A, 8%, 10/1/18 ...................... 9,350,000 A 10,122,217
Kaiser Permanente Medical Care Program,
5.55%, 8/15/25 ................................................ 4,000,000 AA 3,620,720
St. Francis Medical Center, 5.65%, 10/1/14 (c) ................. 1,500,000 AAA 1,404,150
California Housing Finance Agency:
Home Mortgage, Series F1:
6.2%, 8/1/05 (c) .............................................. 845,000 AAA 868,922
6.3%, 8/1/06 (c) .............................................. 1,325,000 AAA 1,361,597
Home Ownership and Improvements Revenue,
Series 1985 A, FHA Insured, 9.2%, 8/1/15 ...................... 45,000 AA 46,577
Multi-Unit Rental Housing Revenue:
Series 1992 A, 7.35%, 8/1/00 .................................. 2,615,000 A 2,823,180
Series 1992 A, 7.4%, 8/1/01 ................................... 1,555,000 A 1,693,706
Series 1992 A, 7.45%, 8/1/02 .................................. 1,015,000 A 1,114,399
Series 1992 A, 7.6%, 8/1/06 ................................... 4,030,000 A 4,409,384
Series 1992 A, 7.75%, 8/1/16 .................................. 2,440,000 A 2,635,468
Series 1992 A, 7.8%, 8/1/23 ................................... 2,635,000 A 2,810,728
Series 1992 A, 7.65%, 8/1/07 .................................. 2,335,000 A 2,548,629
Series 1992 A, 7.1%, 8/1/96 ................................... 1,475,000 A 1,508,394
Series 1992 A, 7.2%, 8/1/97 ................................... 1,620,000 A 1,684,039
Series 1992 A, 7.3%, 8/1/99 ................................... 2,435,000 A 2,599,752
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE FUND
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series II, 7.3%, 8/1/00 ....................................... 345,000 A 374,325
Series II, 7.3%, 8/1/01 ....................................... 375,000 A 408,559
Series II, 7.35%, 8/1/02 ...................................... 400,000 A 438,556
Series lI, 7.35%, 8/1/04 ...................................... 460,000 A 510,779
Series II, 7.35%, 8/1/05 ...................................... 495,000 A 543,050
Series II, 6.5%, 8/1/95 ....................................... 250,000 A 251,135
Series II, 6.75%, 8/1/96 ...................................... 265,000 A 271,228
Series II, 7.35%, 8/1/03 ...................................... 430,000 A 472,901
Series II, 7%, 8/1/97 ......................................... 280,000 A 292,916
Series II, 7.25%, 8/1/98 ...................................... 300,000 A 321,792
Series II, 7.3%, 8/1/99 ....................................... 325,000 A 352,713
Series A, 7.7%, 8/1/09 ........................................ 700,000 761,327
California Pollution Control Revenue:
Pacific Gas and Electric, 8.75%, 1/1/07 ........................ 5,000,000 A 5,493,750
Southern California Edison, Series A, 6.9%, 9/1/06 ............. 3,750,000 A 3,942,863
California State Public Works Board, Lease Revenue,
Department of Corrections:
Del Norte/Imperial:
5.375%, 6/1/18 (c) ........................................... 4,750,000 AAA 4,352,805
Series 1993 C, 4.6%, 12/1/04 (c) ............................. 4,000,000 AAA 3,704,160
Medera Prison, Series A-2, 7.4%, 9/1/10 (c) ................... 1,000,000 AAA 1,161,520
California State Revenue Anticipation Warrants,
RITES Restricted, Series C:
8.47%, 4/25/96** .............................................. 7,500,000 MIG-1 7,790,625
9.66%, 4/25/96** .............................................. 7,500,000 MIG-1 7,790,625
California Statewide Communities
Development Authority, Certificate of Participation:
Lutheran Homes:
Series 1993, 5.5%, 11/15/08 .................................. 1,500,000 A 1,410,780
Series 1993, 5.6%, 11/15/13 .................................. 4,000,000 A 3,618,040
Sisters of Charity - Leavenworth Health Services Corp.:
4.875%, 12/1/10 .............................................. 2,500,000 AA 2,182,075
5%, 12/1/23 .................................................. 2,000,000 AA 1,647,680
Unihealth America, Series A, Zero Coupon,
10/1/05 (c) .................................................... 1,450,000 AAA 798,762
Colleguas-Las Virgines, CA, Public Finance Authority,
Municipal Water District Refunding Project,
Series 1993, 5.125%, 7/1/21 .................................... 2,000,000 AAA 1,753,240
Castaic Lake Water Agency, CA, Certificate of
Participation, 7.25%, 8/1/07 (c) ............................... 1,000,000 AAA 1,146,390
Costa Mesa, CA, Public Financing Authority, Public
Facilities Project, Series 1993 A, 5.25%, 10/1/18 .............. 4,500,000 A 3,827,070
Duarte, CA, Certificate of Participation, City of
Hope Medical Center:
5.75%, 4/1/02 ................................................. 3,525,000 BBB 3,359,149
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.8%, 4/1/03 ................................................... 3,735,000 BBB 3,536,037
Eureka, CA, Public Financing Authority, Tax
Allocation Revenue, Capital Guaranty Insured, 5%, 11/1/16 ...... 1,000,000 AAA 879,790
Fairfield, CA, Public Financing Authority,
Redevelopment Project, 5.25%, 8/1/13 ........................... 1,000,000 AAA 905,850
Fontana, CA, Tax Allocation Revenue, North Fontana
Redevelopment Project, Series 1993 A, 5%, 9/1/20 (c) ........... 1,200,000 AAA 1,034,676
Fresno, CA, Health Facilities Revenue, Holy Cross
Health, 5.625%, 12/1/18 (c) .................................... 1,200,000 AAA 1,116,216
Imperial, CA, Irrigation District Revenue, Certificate
of Participation, 5.2%, 11/1/09 (c) ............................ 2,500,000 AAA 2,370,050
Los Angeles County, CA, Metropolitan Transportation
Authority, Sales Tax Revenue, 4.8%, 7/1/05 (c) ................. 950,000 AAA 885,619
Los Angeles County, CA, Certificate of Participation,
Marina Del Rey, Series 1993 A, 5.75%, 7/1/98 ................... 5,000,000 NR 4,989,250
Los Angeles County, CA, Community Redevelopment
Agency, Bunker Hill Project, Series A, FSA Insured,
5.6%, 12/1/28 ................................................. 2,000,000 AAA 1,815,400
Los Angeles County, CA, Convention & Exhibition
Center Authority, Certificate of Participation:
5.2%, 8/15/09 (c) ............................................. 4,000,000 AAA 3,786,480
Zero Coupon, 8/15/04 (c) ......................................... 3,730,000 AAA 2,156,984
Los Angeles County, CA, Wastewater Revenue, Series
1993 D, 4.7%, 11/1/17 (c)....................................... 1,520,000 AAA 1,260,855
Metropolitan Water District of Southern California,
Waterworks Revenue, 8%, 7/1/08 ................................. 4,800,000 AA 5,826,432
Midpeninsula Regional Open Space District, CA,
Special District Finance Corp., Certificate of
Participation, Series 1993, 5.7%, 9/1/14 ........................ 2,550,000 A 2,313,590
Modesto, CA, Certificate of Participation, Community,
Project, Series A, 5.6%, 11/1/14 ............................... 1,370,000 AAA 1,311,844
Oceanside, CA, Certificate of Participation,
Oceanside Building Authority, Series A, 6%, 4/1/17 ............. 3,000,000 A 2,822,340
Orange County, CA, Local Transportation Authority,
Sales Tax Revenue, 5.1%, 2/15/98 (c) ........................... 5,000,000 AAA 4,747,400
Orange County, CA, Local Transportation Authority:
5.1%, 2/15/10 (c) .............................................. 6,100,000 AAA 5,620,723
5.15%, 2/15/11 (c) ............................................. 5,775,000 AAA 5,304,222
Oxnard, CA, Finance Authority, Lease Revenue,
FSA Insured, 5.375%, 6/1/16 .................................... 2,000,000 AAA 1,835,400
Palmdale, CA, Civic Center Authority,
5.25%, 7/1/15 (c) .............................................. 1,000,000 AAA 912,660
Palomar Pomerado, CA, Health Systems,
4.75%, 11/1/23 (c) ............................................. 1,000,000 AAA 806,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE FUND
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pittsburgh, CA, Public Finance Authority, Wastewater
System Revenue, 5.125%, 6/1/15 (c) ............................. 1,000,000 AAA 896,190
Pittsburgh, CA, Redevelopment Agency, Series 1993 C,
4.625%, 8/1/21 (c) ............................................. 3,500,000 AAA 2,784,845
Pomona, CA, Unified School District, General Obligation:
5.6%, 8/1/14 (c) ............................................... 170,000 AAA 162,824
5.6%, 8/1/15 (c)................................................ 180,000 AAA 171,587
5.6%, 8/1/16 (c) ............................................... 190,000 AAA 180,464
5.6%, 8/1/17 (c) ............................................... 175,000 AAA 166,021
5.6%, 8/1/18 (c) ............................................... 205,000 AAA 194,508
Port of Hueneme, CA, Certificate of Participation,
Capital Improvement, 6%, 4/1/19 (c) ............................ 925,000 AAA 929,690
Redding, CA, Joint Power Water Revenue, Series
1993 A, 5%, 6/15/19 (c) ........................................ 1,330,000 AAA 1,153,576
Rialto, CA, Redevelopment Agency, Tax Allocation
Revenue, Industrial Redevelopment Project,
Series A, 6%, 9/1/23 .......................................... 2,500,000 BBB 2,293,500
Sacramento, CA:
City Financing Authority Lease Revenue Refunding,
5.4%, 11/1/20 (c) ............................................. 11,785,000 AAA 10,822,166
Municipal Utility District:
4.75%, 9/1/21 (c) ............................................. 6,450,000 AAA 5,234,691
5.4%, 11/15/07 (c) ............................................ 3,475,000 AAA 3,403,207
San Bernardino County, CA, Certificate of Participation:
Medical Center Financing Project:
5.25%, 8/1/06 ................................................. 1,000,000 A 866,640
6%, 8/1/09 .................................................... 4,700,000 A 4,286,259
5%, 8/1/26 .................................................... 3,000,000 A 2,157,240
Imbedded Swap Inverse Floater, Series 1992 A,
6.38%, 7/1/16 (c)** ........................................... 4,500,000 AAA 4,104,855
San Bernardino County, CA, Joint Powers Financing
Authority, 6.9%, 9/1/01 (c) .................................... 500,000 AAA 541,715
San Francisco, CA, Redevelopment Financing Agency,
Tax Allocation Revenue, Series A, Zero Coupon, Insured:
8/1/03 (c) .................................................... 1,080,000 AAA 683,824
8/1/04 (c) .................................................... 1,080,000 AAA 643,518
San Joaquin County, CA, Certificate of Participation,
4.75%, 11/15/19 (c) ............................................ 2,000,000 AAA 1,636,100
San Jose, CA, Financing Revenue, Community Facilities Project:
Zero Coupon:
11/15/03 ....................................................... 735,000 A 441,485
11/15/04 ....................................................... 1,605,000 A 899,956
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11/15/05 ..................................................... 1,605,000 A 839,062
11/15/06 ..................................................... 1,605,000 A 780,528
Tax Allocation, 4.75%, 8/1/24 (c) ............................. 5,000,000 AAA 4,019,550
San Mateo County, CA, Capital Projects Program,
Correctional Parking Facilities, Series 1991, Zero Coupon:
7/1/05 (c) ................................................... 1,520,000 AAA 862,083
7/1/04 (c) ................................................... 1,890,000 AAA 1,139,027
County Healthcare Center, Series A, FSA Insured, 5.75%, 7/15/22.. 3,000,000 AAA 2,823,060
Joint Power Finance Authority, Capital
Project Program, Zero Coupon:
7/1/01 (c) .................................................. 1,765,000 AAA 1,266,970
7/1/02 (c) .................................................. 1,715,000 AAA 1,162,959
7/1/03 (c) .................................................. 1,725,000 AAA 1,103,379
Santa Anna, CA, Police Administration and Holding
Facility, Lease Revenue, Series A, 5.3%, 7/1/05 (c) ........... 725,000 AAA 705,940
Santa Clara County, CA, Certificate of Participation:
Foothill De Ana Community College, CA, Series 1993, Connie
Lee Insured, 5.25%, 9/1/21 ................................... 500,000 AAA 436,875
Series A Insured, 4.75%, 2/1/14 (c) ............................. 3,000,000 AAA 2,549,940
Santa Clara County, CA, Finance Authority, Lease
Revenue, YMC Replacement Project, 7.75%, 11/15/08 (c) ......... 3,250,000 AAA 3,871,498
Santa Margarita/Dana Point, CA, Improvement
Districts 3, 3A, 4 and 4A, 7.25%, 8/1/05 (c) .................. 2,895,000 AAA 3,320,768
Santa Monica, CA, Wastewater Revenue, Hyperion
Project, 4.75%, 1/1/12 (c) .................................... 3,000,000 AAA 2,592,630
Saugus, CA, Unified School District, Series A,
5.7%, 9/1/18 (c) .............................................. 1,700,000 AAA 1,615,714
South Orange County, CA, Public Power Authority,
Special Tax Revenue, 7%, 9/1/06 (c) ........................... 2,230,000 AAA 2,500,588
Southern California Public Finance Authority, Power
Project, Revenue Refunding, Zero Coupon, 7/1/14 (c) ........... 13,000,000 AAA 3,938,740
Stockton, CA, Health Facilities Revenue, St. Joseph
Medical Center, Series A, 5.625%, 6/1/13 (c) .................. 1,930,000 AAA 1,831,975
United Water Conservation District, Certificate
of Participation, FSA Insured, 5.8%, 5/1/13 ................... 1,350,000 AAA 1,304,478
University of California, Certificate of Participation,
UCLA Center, Chiller Cogeneration Project, Connie Lee Insured:
5%, 11/1/05 ................................................... 3,920,000 AAA 3,745,913
5.1%, 11/1/06 ................................................. 4,395,000 AAA 4,194,896
5.6%, 11/1/20 ................................................. 5,735,000 AAA 5,282,279
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE FUND
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Walnut Creek, CA, Certificate of Participation, John
Muir Medical Center:
5%, 2/15/20 (c) .............................................. 1,000,000 AAA 863,480
5%, 2/15/16 (c) .............................................. 1,500,000 AAA 1,316,190
West Covina, CA, Queen of the Valley Hospital,
Certificate of Participation, Hospital Revenue, Series 1994:
5.7%, 8/15/00 ................................................ 380,000 A 373,772
5.8%, 8/15/01 ................................................ 750,000 A 737,423
Westminster, CA, Redevelopment Agency,
Tax Allocation Revenue, Community Development,
Project -1, Series A, 7.3%, 8/1/21 ........................... 2,000,000 BBB 2,068,940
VIRGIN ISLANDS Virgin Islands Public Finance Authority, General
Obligation, Mortgage Fund Loan Notes, Series 1992 A:
6.25%, 10/1/96 ............................................... 3,400,000 BBB 3,449,878
6.5%, 10/1/97 ................................................ 2,955,000 BBB 3,027,980
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $281,832,135 ............................................ 282,954,000
-----------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $294,032,135) (a) ....................................... 295,154,000
===========
<FN>
(a) The cost for federal income tax purposes was $294,041,229. At March 31, 1995, net unrealized appreciation for all
securities based on tax cost was $1,112,771. This consisted of aggregate gross unrealized appreciation for all securities
in which there was an excess of market value over tax cost of $6,472,545 and aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over market value of $5,359,774.
(b) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are assigned by either Standard & Poor's Rating Group, Moody's Investors Service, Inc.
or Fitch Investors Service, Inc. Unrated securities (NR) have been determined to be of comparable quality to rated eligible
securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities whose yields vary with a designated market index
or market rate, such as the coupon-equivalent of the Treasury bill rate. Variable rate demand notes are securities whose yields
are periodically reset at levels that are generally comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable letter of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the longer of the period remaining until the next rate change
or to the extent of the demand period.
** Inverse floating rate notes are instruments whose yields have an inverse relationship to benchmark interest rates. These
securities are shown at their rate as of March 31, 1995.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------------------------
MARCH 31, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $294,032,135)
(Note A) .................................................. $295,154,000
Receivables:
Interest ................................................... 5,145,929
Fund shares sold ........................................... 113,963
Other assets ................................................. 2,574
------------
Total assets .......................................... 300,416,466
LIABILITIES
Payables:
Due to custodian bank ...................................... $ 29,860
Investments purchased ...................................... 5,404,793
Dividends .................................................. 503,997
Fund shares redeemed ....................................... 172,823
Accrued management fee (Note C) ............................ 150,300
Other accrued expenses (Note C) ............................ 91,319
------------
Total liabilities ..................................... 6,353,092
------------
Net assets, at market value .................................. $294,063,374
============
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments................ $ 1,121,865
Accumulated net realized loss ........................ (14,125,109)
Shares of beneficial interest ........................ 292,078
Additional paid-in capital ........................... 306,774,540
------------
Net assets, at market value .................................. $294,063,374
============
NET ASSET VALUE, offering and redemption price per share
($294,063,374 / 29,207,833 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) ................................ $10.07
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE FUND
- ------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................... $18,052,189
Expenses:
Management fee (Note C)..................................... $ 1,861,185
Services to shareholders (Note C)........................... 273,937
Custodian and accounting fees (Note C)...................... 120,704
Trustees' fees (Note C)..................................... 14,177
Reports to shareholders..................................... 45,604
Auditing.................................................... 37,130
Legal....................................................... 6,740
Other....................................................... 44,737 2,404,214
--------------------------
Net investment income....................................... 15,647,975
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT
TRANSACTIONS
Net realized loss from:
Investments......................................... (9,631,420)
Futures contracts................................... (45,176)
Option contracts.................................... (189,188) (9,865,784)
----------
Net unrealized appreciation on Investments.................. 12,444,920
-----------
Net gain on investment transactions......................... 2,579,136
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $18,227,111
===========
</TABLE>
26
<PAGE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income.............................. $ 15,647,975 $ 16,470,180
Net realized gain (loss) from investment
transactions................................... (9,865,784) 10,581,523
Net unrealized appreciation (depreciation)
on investment transactions during the
period......................................... 12,444,920 (23,705,226)
------------ ------------
Net increase in net assets resulting from
operations..................................... 18,227,111 3,346,477
------------ ------------
Distributions to shareholders:
From net investment income ($.51 and
$.53 per share, respectively)............. (15,647,975) (16,470,180)
------------ ------------
From net realized gains from investment
transactions ($.09 and $.63 per share,
respectively)............................. (2,705,552) (18,977,992)
------------ ------------
In excess of net realized gains ($.05 per
share).................................... -- (1,553,773)
------------ ------------
Fund share transactions:
Proceeds from shares sold.......................... 54,322,312 106,045,976
Net asset value of shares issued to
shareholders in reinvestment
of distributions............................... 12,092,024 27,738,803
Cost of shares redeemed............................ (97,589,593) (83,273,345)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions........................ (31,175,257) 50,511,434
------------ ------------
INCREASE (DECREASE) IN NET ASSETS.................. (31,301,673) 16,855,966
Net assets at beginning of period.................. 325,365,047 308,509,081
------------ ------------
NET ASSETS AT END OF PERIOD........................ $294,063,374 $325,365,047
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period.......... 32,478,431 27,912,312
------------ ------------
Shares sold........................................ 5,531,252 9,646,082
Shares issued to shareholders in
reinvestment of distributions.................. 1,227,120 2,556,726
Shares redeemed.................................... (10,028,970) (7,636,689)
------------ ------------
Net increase (decrease) in Fund shares............. (3,270,598) 4,566,119
------------ ------------
Shares outstanding at end of period................ 29,207,833 32,478,431
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
SCUDDER CALIFORNIA TAX FREE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period....... $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18 $10.95 $ 9.54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income..... .51 .53 .59 .61 .63 .65 .68 .69 .71 .73
Net realized and
unrealized gain
(loss) on investment
transactions............ .14 (.35) .94 .47 .21 .22 .27 (.93) .53 1.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ .65 .18 1.53 1.08 .84 .87 .95 (.24) 1.24 2.14
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income.................. (.51) (.53) (.59) (.61) (.63) (.65) (.68) (.69) (.71) (.73)
From net realized gains
on investment........... (.09) (.63) (.49) (.28) (.09) (.19) -- (.26) (.30) --
In excess of net
realized gains.......... -- (.05) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (.60) (1.21) (1.08) (.89) (.72) (.84) (.68) (.95) (1.01) (.73)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................... $10.07 $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18 $10.95
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)............ 6.75 1.30 15.13 10.74 8.53 8.62 9.80 (1.70) 12.11 23.19
RATIO AND SUPPLEMENTAL
DATA
Net assets, end of period
($ millions).............. 294 325 309 242 208 193 171 153 195 133
Ratio of operating
expenses, net to
average daily net
assets (%)................ .80 .78 .79 .81 .84 .83 .89 .88 .84 .88
Ratio of net investment
income to average daily
net assets (%)............ 5.18 4.85 5.42 5.79 6.13 6.23 6.71 6.95 6.55 7.11
Portfolio turnover rate..... 87.3 126.5 208.6 143.0 170.6 70.4 158.9 52.3 68.0 92.6
</TABLE>
28
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder California Tax Free Money Fund ("Tax Free Money Fund"), a nondiversified
fund, and California Tax Free Fund ("Tax Free Fund"), a diversified fund, are
each a series of Scudder California Tax Free Trust (the "Trust") which is
organized as a Massachusetts business trust and registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. The policies described below are followed consistently by
the Funds in the preparation of their financial statements in conformity with
generally accepted accounting principles.
SECURITY VALUATION. Tax Free Money Fund values all portfolio securities
utilizing the amortized cost method permitted in accordance with Rule 2a-7 under
the 1940 Act and pursuant to which Tax Free Money Fund must adhere to certain
conditions. Under this method, which does not take into account unrealized
gains and losses on securities, an instrument is initially valued at its cost
and thereafter assumes a constant accretion/amortization to maturity of any
discount/premium.
Tax Free Fund's portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which prices reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Trustees. Short-term
investments having a maturity of sixty days or less are valued at amortized
cost.
OPTIONS. The Tax Free Fund may write (sell) exchange-listed and over-the-counter
call and put options on securities and other financial instruments. When the Tax
Free Fund writes a call, it gives the purchaser of the call option the right to
buy the underlying security at the price specified in the option (the "exercise
price") at any time during the option period, generally ranging up to nine
months. When the Tax Free Fund writes a put option, it gives the purchaser of
the put option the right to sell the underlying security to the Tax Free Fund at
the exercise price at any time during the option period, generally ranging up to
nine months.
29
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
If the option expires unexercised, the Tax Free Fund Fund will realize income,
in the form of a capital gain, to the extent of the amount received for the
option (the "premium"). If the option is exercised, a decision over which the
Tax Free Fund Fund has no control, the Tax Free Fund Fund must sell the
underlying security to the option holder or purchase the underlying security
from the option holder at the exercise price. Certain options, including
options on indices will require cash settlement by the Tax Free Fund Fund if
the option is exercised. By writing a call option, the Tax Free Fund Fund
foregoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price. By writing a put
option, the Tax Free Fund Fund , in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price.
The liability representing the Tax Free Fund Fund's obligation under an exchange
traded written options are valued at the last sale price or, in the absence of a
sale, the mean between the closing bid and asked quotations or at the most
recent asked quotation if no bid and asked quotations are available. Over the
counter written options are valued at the most recent asked quotation.
In addition, the Tax Free Fund Fund may purchase, singly and in combination,
call and put options on securities and other financial instruments. Exchange
traded purchased options are valued at the last sales price or, in the absence
of a sale, the mean between the closing bid and asked quotations or at the most
recent bid quotation if no bid and asked quotations are available.
Over-the-counter purchased options are valued at the most recent bid quotation.
FUTURES CONTRACTS. The Tax Free Fund may enter into interest rate and
securities index futures contracts for bona fide hedging purposes. Upon
entering into a futures contract, the Tax Free Fund is required to deposit with
a broker an amount ("initial margin") equal to a certain percentage of the
purchase price indicated in the futures contract. Subsequent payments
("variation margin") are made or received by the Tax Free Fund each day,
dependent on the daily fluctuations in the value of the underlying security,
and are recorded for financial reporting purposes as unrealized gains or losses
by the Tax Free Fund. When entering into a closing transaction, the Tax Free
Fund will realize, for book purposes, a gain or loss equal to the difference
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
between the value of the futures contract to sell and the futures contract to
buy. Futures contracts are valued at the most recent settlement price. Certain
risks may arise upon entering into futures contracts from the contingency of
imperfect market conditions.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Funds' policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of their taxable and tax-exempt income to their
shareholders. Accordingly, the Funds paid no federal income taxes and no
provisions for federal income taxes were required.
As of March 31, 1995, the Tax Free Money Fund had a net tax basis capital loss
carryforward of approximately $76,000, which may be applied against any realized
net taxable capital gains of each succeeding year until fully utilized or until
March 31, 2000 ($14,000), and March 31, 2002 ($7,000) and March 31, 2003
($55,000), the respective expiration dates, whichever occurs first.
The Tax Free Money Fund and the Tax Free Fund, from November 1, 1994 through
March 31, 1995, incurred approximately $12,000 and $2,901,000, respectively, of
net realized capital losses which the funds intends to elect to defer and
treat as arising in the fiscal year ended March 31, 1996.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Funds
is declared as dividends to shareholders of record as of the close of business
each day and is paid to shareholders monthly.
During any particular year, net realized gains from investment transactions,
in excess of available capital loss carryforwards, would be taxable to the
Funds if not distributed and, therefore, will be distributed to shareholders.
An additional distribution may be made to the extent necessary to avoid the
payment of a four percent federal excise tax.
31
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
primarily relate to investments in options, futures, and certain securities
sold at a loss. As a result, net investment income and net realized gain (loss)
on investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Funds may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Funds.
The Funds use the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment transactions are accounted for on a trade-date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the
call or maturity date.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
During the year ended March 31, 1995, purchases and sales of long-term municipal
securities aggregated $247,881,413 and $261,258,316, respectively, for the Tax
Free Fund.
The aggregate face value of futures contracts opened and closed during the
year ended March 31, 1995, for the Tax Free Fund, was $484,601,894.
C. RELATED PARTIES
- --------------------------------------------------------------------------------
Each Fund has entered into an Investment Management Agreement (each an
"Agreement" and collectively the "Agreements") with Scudder, Stevens & Clark,
Inc. (the "Adviser"), under which each Fund agrees to pay the Adviser a fee
computed and accrued daily and paid monthly. The management fee payable under
the Agreements is equal to an annual rate of 0.50% of the average daily net
assets of Tax Free Money Fund, and 0.625% of the first $200,000,000 of the
average daily net assets and 0.60% of such net assets in excess of $200,000,000
for Tax Free Fund. As manager of the assets of Tax Free Money Fund and Tax Free
Fund, the Adviser directs the investments of Tax Free Money Fund and Tax Free
Fund in accordance with the investment objectives, policies, and restrictions
of each Fund. The Adviser determines the securities, instruments, and other
contracts relating to investments to
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
be purchased, sold or entered into by each Fund. In addition to portfolio
management services, the Adviser provides certain administrative services in
accordance with the Agreements. The Agreements also provide that if the Funds'
expenses, exclusive of taxes, interest and certain other expenses exceed
specified limits, such excess, up to the amount of the management fee, will be
paid by the Adviser. For the year ended March 31, 1995, the fee for Tax Free
Fund pursuant to the Agreement amounted to $1,861,185, which was equivalent to
an annualized effective rate of .62% of the Fund's average daily net assets.
With respect to Tax Free Money Fund, the Adviser has agreed not to impose all
or a portion of its management fee until July 31, 1995 and during such period
to maintain the annualized expenses of Tax Free Money Fund at not more than
0.60% of average daily net assets. For the year ended March 31, 1995, the
Adviser did not impose a portion of its fee amounting to $162,146, and the
portion imposed amounted to $180,098.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend-paying and shareholder service agent for the Funds.
For the year ended March 31, 1995, $84,167 and $188,774 were charged by SSC
to Tax Free Money Fund and Tax Free Fund, of which $6,217 and $14,456 are unpaid
at March 31, 1995, respectively.
Effective September 27, 1994 and August 1, 1994, Scudder Fund Accounting
Corporation ("SFAC"), a wholly-owned subsidiary of the Adviser, assumed
responsibility for determining the daily net asset value per share and
maintaining the portfolio and general accounting records for the California Tax
Free Money Fund, and California Tax Free Fund, respectively. For the period
September 27, 1994 to March 31, 1995, SFAC imposed fees amounting to $15,684 of
which $2,500 was unpaid at March 31, 1995 for the California Tax Free Money
Fund. For the period August 1, 1994 to March 31, 1995, SFAC imposed fees
amounting to $42,784 of which $5,391 4 was unpaid at March 31, 1995 for the
California Tax Free Fund .
The Trust pays each Trustee not affiliated with the Adviser $4,000 annually
plus specified amounts for attended board and committee meetings. For the year
ended March 31, 1995, Trustees' fees aggregated $14,177 each for both Tax Free
Money Fund and Tax Free Fund.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER CALIFORNIA TAX FREE TRUST AND THE SHAREHOLDERS OF
SCUDDER CALIFORNIA TAX FREE MONEY FUND AND SCUDDER CALIFORNIA TAX FREE FUND:
We have audited the accompanying statements of assets and liabilities of Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund, including
the investment portfolios, as of March 31, 1995, and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund as
of March 31, 1995, the results of their operations for the year then ended,
the changes in their net assets for each of the two years in the period then
ended, and their financial highlights for each of the periods indicated therein
in conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 10, 1995
34
<PAGE>
TAX INFORMATION
- --------------------------------------------------------------------------------
Of the dividends paid by the California Tax Free Money Fund and California Tax
Free Fund from net investment income for the taxable year ended March31, 1995,
100% constituted exempt interest dividends for regular federal income tax and
California State income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
35
<PAGE>
(This page intentionally left blank.)
36
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Daniel Pierce*
Trustee
Olin Barrett*
Vice President
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
37
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
The Scudder Family of Funds
<CAPTION>
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax Free Money Market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Global Income Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
<FN>
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</FN>
</TABLE>
38
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<S> <C>
Account Service and Information
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields, exchanges, and redemptions
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder
Investor Services, Inc., Distributor.
<FN>
* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus with more complete
information, including management fees and expenses. Please read it carefully before you invest or send money.
</FN>
</TABLE>
39
<PAGE>
Celebrating 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven Clark,
Scudder, Stevens & Clark was the first independent investment counsel firm in
the United States. Since its birth, Scudder's pioneering spirit and commitment
to professional long-term investment management have helped shape the investment
industry. In 1928, we introduced the nation's first no-load mutual fund. Today
we offer 36 pure no load(TM) funds, including the first international mutual
fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
